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Why inflation must be tamed now by monetary authorities

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Economy

Economy

Like an ill wind that blows no one any good, inflation in Nigeria continues to soar eerily high, reaching a 17-year high of 19.64% in July and with it, baleful consequences.

The last time inflation was near this height was in September 2005 in the days of Olusegun Obasanjo as president. Reports had it that inflation was at a fiery height of 24.32% that year. This is supported by data from Nairalytics, a web portal that publishes Nigeria’s historical macroeconomic data. Notably, the uptick in the inflation rate was driven by increases in the food and core index.

Indeed, the consistent rise in the mechanism that gauges the cost of living should be clear to all that the Nigerian economy has entered the thick of an inflationary era that only bold economic actions can temper.

With a forecast of higher future prices by economic watchers, it means inflation, ceteris paribus, will be a focal point of our national economic management going forward. To make matters worse, we are facing higher international prices, energy shortage, rising food prices, and a weak Naira.

Baleful consequences

The inflation-inducing factors on the local scene include higher cost of food, clothing and footwear, health, transportation and utilities among others. Prices of these items look set to rise in the coming months from supply shortages mostly.

International prices would add to the spike because we are an import-dependent economy. An import-dependent economy tends to import inflation, reflecting the cost of inputs and finished products from the external economy. A weak naira will further exacerbate the problem as much more of it is required to get a dollar.

An inflationary economy makes goods and services dearer and out of reach for a larger segment of the population. In Nigeria, that would be more than 70% of the population. It also has consequences for borrowers who would be forced to pay higher interest for loans and advances. It is theoretically impossible for interest rates to be lower than inflation.

Seeing that that is the fate of the economy, the institution saddled with the job of price stability, which is the Central Bank should be up to that task. It should start preparing for how to tackle the inevitability of much higher inflation going forward. It should work out how it plans to manage the tradeoff between inflation and growth. It is a situation that requires a delicate balance that must be well thought through given our economy’s peculiarities as one without a solid manufacturing and export base.

Lesson from the United States’ FED

It is a challenge that can be dealt with head-on as the Federal Reserve Bank (FED) did in the days of the late Paul Volcker as Chairman. Volcker fought the prevailing 10 percent annual inflation rates with contractionary monetary policy. As the Fed Chair, he moved forward by doubling the then funds rate courageously doubled the fed funds rate from 10.25 percent to 20 percent in March 1980. Economic historians have come to know that action as the “Volcker shock”. The move reduced and eventually ended inflation in his time.

But for Volcker and the American economy, this was a catch-22 as that inflation vanquishing policy also triggered the 1981 recession.

Learning from the Fed, the Central Bank of Ngeria must not only move with interventional policies but must also know how to measure its intervention and discern when to stop in its policy application. It will be a wise move to start planning the scenarios now.

... Why inflation must be tamed now by monetary authorities Read More on ... Naijaonpoint.

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