Nigeria’s inflation to edge higher as planting season takes its toll on food prices

Nigerian inflation has maintained an upward trajectory in the last sixteen months due to significant Naira depreciation, higher logistics costs, infrastructural deficiencies, and other structural challenges. Our model suggests that this upward trend will likely continue when the National Bureau of Statistics publishes its CPI and inflation report for May next week (June 15). Headline inflation, representing the year-on-year change in the overall price level, is projected to rise to 34.3% from 33.69% in April. If this projection holds, it will mark the highest inflation rate in 28 years. We expect price pressures to increase across the food and non-food baskets. Food inflation is expected to spike by 0.66% to 41.19% while core inflation is estimated to rise by 0.39% to 27.23%. Screenshot 2024-06-10 134455.png Monthly inflation to rise to 2.4% as the planting season peaks Following two consecutive months of moderation, the month-on-month inflation, a more current gauge of price movement, is projected to rise by 0.11% to 2.4% (annualized at 32.86%) in May from 2.29% (annualized at 31.16%) in April. This resurgence in monthly inflationary pressures is largely attributed to the impact of the planting season. Notably, the second quarter is the peak of the planting season, leading to reduced commodity supply and consequent price hikes. Some commodities that have recorded significant price hikes include tomatoes, yams, beans, and garri. The shift in the downward trajectory of monthly prices may raise concerns about the possibility of inflation remaining elevated for longer than initially anticipated.

Screenshot 2024-06-10 134810.png Is Nigeria on the Brink of another wage-driven inflation wave?

In response to the rising cost of living in Nigeria, the labour union has been discussing with the Federal government to increase the minimum wage in a bid to ease the cost pressure on the citizenry. Truthfully, the high fuel cost and sharp depreciation in the exchange rate are taking a huge toll on the Nigerian populace, making an adjustment in the minimum wage crucial in improving living standards. While a minimum wage review is vital at this time, it is important to be mindful of the potential inflationary impact, especially if it is not complemented with a proportional boost in productivity.

In the short term, rising wages can fuel consumer spending, driving economic growth and prosperity. However, if wage increases outpace productivity gains, it can lead to cost-push inflation, where businesses pass on higher production costs to consumers. This, in turn, erodes purchasing power and diminishes the real value of wages over time. Moreover, wage-driven inflation can trigger a cycle of wage-price spirals, wherein workers demand higher wages to offset the rising cost of living, further exacerbating inflationary pressures.

Meanwhile, there has also been some controversy surrounding what the ideal wage should be, which brings us to the difference between minimum and living wage. The minimum wage refers to the legally mandated lowest hourly wage rate that employers are required to pay their employees by law, while a living wage on the other hand, represents the income level necessary for a worker to afford the essentials of life, including housing, food, transportation, healthcare, and other necessities, without relying on government assistance or charitable support. While the Federal government is proposing a new minimum wage of N48,000, it appears that the labour union is tilting towards a living wage of above N400,000. The question that then arises from this is whether the government is able to afford this, considering the current financial strain. We think that beyond the minimum wage increase, efforts should be geared toward addressing the supply-side constraints, which are mostly structural. This will moderate prices and increase the real value of wages.




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