Why Do High Living Costs Persist Despite Lower Inflation in Nigeria?

Nigeria has recently adjusted its consumer price index (CPI) from 2009 to 2024, resulting in a reported decrease in the inflation rate from 34.80% to 24.48%.

This change has sparked discussions about its potential impact on economic planning, policy decisions, and the public’s perception of inflation. Economist Taiwo Odugbemi explains what rebasing the inflation rate entails and its implications for the country.

Understanding Inflation Rate Rebasing

Inflation rate rebasing is conducted by the National Bureau of Statistics through a structured approach that aims to enhance the accuracy of inflation measurements. This involves expanding the data collection to cover a wider array of states, local government areas, and rural communities.

Recent Adjustments Include:

Updating the CPI Basket

The bureau updated the mix of goods and services in the CPI basket, which tracks monthly or annual price changes, to better reflect shifts in consumer spending habits. This update is based on household expenditure surveys that gather data on consumption and spending patterns.

Changing the CPI Basket Composition

Categories such as telecommunications and technology now have greater weight, while items like food and non-alcoholic beverages have been down weighted to ensure the CPI accurately reflects current household expenditures.

Rebasing the Inflation Index

The reference year for the CPI has been updated from 2009 to 2024, aligning inflation measurements with current economic realities and minimizing distortions from outdated data. This change is supported by new data collection methods like the National Longitudinal Phone Survey, which allows for timely economic assessments.

Adjusting CPI Component Weights

Weights for various CPI components have been updated based on new national consumption data, giving more importance to sectors like transport and digital services, while reducing the emphasis on others like gas and other fuels.

Expanding Data Collection Coverage

The National Bureau of Statistics has increased its sample size and geographic coverage, incorporated informal market price variations, and increased the frequency of data collection. The informal sector, which constitutes about 58% of Nigeria’s GDP, is now better represented.

Implications of the Rate Rebase

Rebasing the inflation rate is not uncommon and is part of ongoing efforts to more accurately reflect price movements and economic conditions. Similar updates have been made by other countries, such as Ghana and Kenya, which have also revised their CPI bases to reflect more current spending habits.

Despite the reported drop in the inflation rate, many Nigerians continue to feel the pinch of high living costs, especially with persistent food inflation. For workers and businesses, this adjustment might influence wage negotiations and pricing strategies. 

Employers may use the lower official inflation rate as a reason to offer smaller wage increases, arguing that the real cost of living has not increased as sharply.

Policy Changes to Anticipate:

This adjustment could prompt a shift in how monetary, fiscal, and exchange rate policies are formulated:

Monetary Policy Adjustments

The Central Bank of Nigeria (CBN) might relax its aggressive tightening stance, which has previously led to high interest rates aimed at curbing inflation. With the new inflation figure, the bank might opt for a more balanced approach to interest rate adjustments, potentially easing borrowing costs for businesses and households.

Fiscal Policy Considerations

The government could reassess budget projections and public sector wage policies based on the revised inflation data. This might also affect subsidy policies in sectors like energy and agriculture, possibly justifying gradual phaseouts.

Exchange Rate Management

Improved inflation figures could bolster investor confidence and reduce pressure on the Nigerian naira. The central bank may adjust its foreign exchange interventions accordingly, aiming for greater currency stability.