5 causes of Inflation in Nigeria

Nigeria’s headline inflation rate accelerated to 32.7% in September 2024, up from 32.2% the previous month. This is the first increase of inflation in Nigeria in three months.

Inflation in Nigeria is driven by several factors, promoting economic challenges and putting pressure on household incomes.

Here are 5 causes of inflation in Nigeria

High Fuel Prices

The removal of fuel subsidies in mid-2023 has led to a significant increase in fuel prices and this has further increased the cost of transportation, which in turn increases the price of goods and services. The increase in fuel prices also has a ripple effect across all sectors of the economy.

Exchange Rate Volatility

Nigeria’s economy is strongly reliant on imports, and variations in the naira’s exchange rate versus foreign currencies such as the US dollar cause inflation. When the naira falls, the price of imported products rises, adding to higher inflation. Currency devaluations and foreign exchange restrictions have exacerbated the problem.

Food Supply Constraints

Nigeria faces enormous obstacles in food production and distribution, such as insecurity in important agricultural areas, inadequate infrastructure, and post-harvest loss. These factors disturb the supply chain and contribute to increased food costs, which account for a significant share of inflation in the country.

Monetary Policy and Money Supply

Expansionary monetary policies, such as the Central Bank of Nigeria’s (CBN) interventions and liquidity injections, can also contribute to inflation. Excess liquidity in the economy, paired with restricted production capacity, results in increased demand for products and services, which raises prices.

Global Factors and External Shocks

Global inflationary tendencies, particularly in key trading partners, influence the price of imported goods. Rising global food prices, supply chain disruptions, and geopolitical tensions (for example, the Russia-Ukraine war) have all contributed to higher import costs, notably in the food and energy sectors, worsening Nigerian inflation.

Inflation in Nigeria will continue to deepen if this fundermental factors are not addressed adequately.