Nigerians lament that despite naira’s gains last week, the costs of goods and services remain high.
Last week, the naira miraculously recovered to N680/$ after reaching an all-time low of N900/$. Black market traders attributed the sudden improvement to eased demand and increased inflows of FX in the market.
When the naira reached its all-time low, market participants reacted by rapidly raising their prices. However, now that the exchange rate has appreciated, prices are not falling as quickly, resulting in a price rigidity situation, otherwise known as price stickiness.
Price stickiness according to John Maynard Keynes in his book ‘The General Theory of Employment, Interest, and Money‘, identified how easy it is for prices to rise compared to how difficult it is for prices to fall.
Price stickiness, also known as sticky prices, refers to a price’s tendency to remain constant or slowly adjust despite changes in the cost of producing and selling the goods or services.
In the case of Nigeria, prices quickly adjusted upwards on news that the cost of goods would rise due to the depreciating naira. Now that the exchange rate has stabilised, prices have failed to respond accordingly.
As expected, many Nigerians have noticed the stocky prices. And as typical of them, they took to social media to vent their frustration.
Nigeria’s already high structural inflation has been aggravated by global commodity price spikes and supply constraints. Annualised inflation reached a 17-year high point of 20.8% in October 2022.
In Fitch’s recent report inflation forecasts is to average 19% in 2022 and fall only moderately to 17.8% in 2023. By comparison, the ‘B’ median is 8.5%. The CBN raised the monetary policy rate three times by a total of 450bp in 2022 and has used the cash reserve ratio to periodically remove liquidity from the domestic banking sector.
Furthermore, A Professor of Applied Economics at Johns Hopkins University, Professor Steve H. Hanke, has argued that the actual inflation rate in Nigeria is worse than what is being reported by the National Bureau of Statistics.
Based on Hanke’s Inflation Dashboard, the inflation rate in Nigeria is an eye-popping 52%, not the 20.8% official record reported for September 2022.