2023 started on a good note: the raging global inflation of 2022 finally cooled down in December. This means that prices increased at a slower pace than in December 2021.
The US, which experienced its highest inflation in 40 years last year, recorded the sixth consecutive decline in its annual consumer price index (CPI) in December, prompting the Fed to reconsider increasing interest rates at a slower pace. Investors also reacted favourably to the great news. Following the announcement of the December inflation report, the stock market—specifically the S&P 500 and Nasdaq stocks—appreciated.
Key takeaways:
-
Consumers across several parts of the world experienced relief in their pockets during the festive season as headline inflation declined.
- In Western markets like the US, UK and Europe, this decline was driven mainly by reduced petrol prices caused by lower demand. This gives central banks, especially the US Fed, room to ease off on
The UK was not excluded from the party as its inflation reduced to 10.6% in its second consecutive month. Likewise, in Europe, consumer inflation expectations have been reduced for the first time since 2021.
In Nigeria, inflation reduced year-on-year from 21.47% to 21.34%, the first decline since November 2021. I'm sure I speak for all of us when I say this is music to our ears, given the pressure on our wallets last year.
But before we get excited, it's worth checking if this is merely a fluke or the start of a downward spiral in inflation, especially for Nigeria. To do this, we'll examine the drivers of the global inflation decline, why Nigeria's inflation is reducing and if it will continue for the rest of the year.
The land of the free, shackled by inflation
Let's start with the US, given its size as the largest economy in the world and its interconnectedness with the rest of the world. Essentially, when the US sneezes, the whole world catches a cold.
In its recently released inflation report, US inflation reduced by 0.1% to 6.5% year-on-year in December. That's the lowest its inflation has been since October 2021. So, has the Federal Reserve's continuous interest rate hike been working?
Inflation declined in December primarily because of the 9.5% reduction in petrol pump prices, from a peak of $5/gallon in June 2022 to $3.3/gallon in December 2022—as low as it was a year before.
This is exciting news considering that fuel prices were a significant driver of inflation globally in 2022—petrol on the consumer side and diesel on the producer side. As a result of the reduced global fuel demand, consumers felt relief in their pockets. However, this relief may be short-lived, considering that fuel prices might increase if crude oil prices increase.
Also, even with the reduced headline inflation, US inflation is far from the Fed’s target of 2%. Core inflation, which measures inflation outside of the volatile food and energy prices, increased by 0.3% to 5.7%, with segments like housing, clothing and recreational activities recording gains, although slower than before. The sustained inflation in these categories could be because consumers have more money to spend on other things as energy inflation reduces.
However, the Fed’s plans are working because the pace of inflation is slower than before. There are also speculations that inflation in segments like housing is yet to reflect the impact of the interest rate hikes because of the time lag between the interest rate rise and their influence on consumer behaviour.
This means that although the Fed will increase its interest rates, the rate of increase will still be much lower than before. Therefore, the US has cause to celebrate the decline in consumer prices, but with caution, as prices in other sectors still need to slow down before the US can be out of the woods.
The long reign of inflation
How, then, are other large economies like the UK and Europe doing?
Like the US, consumers in the UK got a slight break from the cost of living crisis as fuel prices dropped, causing a slowdown in inflation. The country witnessed its second consecutive decline in inflation rates in December, to 10.5% from 10.7% in November. Core inflation, on the other hand, remained unchanged.
However, this is far from normal for the UK, which has a target of 2% inflation, given how its annual inflation doubled between January and December 2022. Also, in December 2022, food inflation rose to 16.9%, the highest since 1977.
So, even though energy costs have reduced slightly, UK residents are still in a severe cost of living crisis because wages are not rising as rapidly as prices. Several economists estimate that, like 2022, this year remains tough for households as they anticipate a recession that may lead to many losing jobs.
Unlike the US Fed, which may reduce the magnitude of its interest rate hikes, the Bank of England could continue increasing interest rates aggressively till later this year.
Europe's outlook is not as grim, as inflation has reduced to single digits to 9.2% from 10.1% year-on-year in November. Again, fuel prices contributed to this, with the European Union's energy inflation reducing from 34.9% to 25.7%.
Another driver of inflation is how much consumers expect prices to change. In Europe, the inflation expectations go as far as influencing wage negotiations and then domestic prices—which then inform the inflation rate. So, reducing inflation expectations means a decline in actual inflation is just around the corner.
Therefore the progress in fighting inflation is widespread across the globe. But how much of this is reflected at home?
Nigeria
As I highlighted earlier, the news of reduced inflation seems universal. Nigeria's inflation in December also reduced from 21.4% to 21.3%—still the highest since 2005.
But let's stay focused because monthly inflation grew. Between November and December, inflation increased by 1.7% from 1.5% between October and November, showing that prices of goods increased more in December than the month before.
Digging deeper into the sectoral distribution reveals an even grimmer picture. Across many sectors, inflation increased, particularly across segments like transportation, education and recreation and hotels.
Transportation inflation was driven by petrol scarcity—which we’ll go into in more detail later. Likewise, in education, prices have increased to reflect headline inflation—as it rose steadily throughout 2022. On the other hand, recreation and hotels were driven by the increased demand during the festive season.
As you’ve noticed throughout the article, petrol was the star of the show in December, but how did it do in Nigeria? Unlike the rest of the world, Nigerians were not so fortunate with lower petrol prices because ours never reflected the global prices in the first place. This is because the government subsidises Nigerian petrol prices.
The flip side to that, however, is that as crude oil prices increased for most of last year, the government could no longer sustain the subsidy, a major contributor to the petrol scarcity. This ultimately led to higher transportation costs in December.
However, talking about Nigeria’s inflation is impossible without speaking about food.
Like headline inflation, food inflation reduced from 24.3% (the highest since 2005) in November to 23.8% in December, year-on-year, although it increased month-on-month. This is not surprising, given the seasonal increase in food inflation every December. Also, the major flooding in the middle belt—the nation’s food basket—was another big trigger for inflation.
Still, if inflation was this bad in December, why did the inflation reduce year-on-year? It's simply how we calculate inflation.
Annual inflation compares the increase in the prices of goods and services today to the increase in prices around the same time the year before. Therefore, inflation reduced because the rate at which prices increased in December 2021 was much faster than in 2022.
Still, the prices increased faster in December than November—possibly due to lower consumer demand than the previous year.
In line with this, data from Stanbic IBTC Bank's Purchasing Managers' Index (PMI) in December shows that producers experienced an improvement in consumer demand for their goods primarily due to the festive season.
However, given the increased cost of production (caused by currency devaluation), the PMI also recorded the second-largest rise in selling prices since 2014. This means that while producers were selling more to their customers, they were charging higher than usual because their production costs were increasing rapidly. This loop could have triggered the higher monthly inflation in December. All these indicate that celebrating a decline in Nigeria's inflation is premature.
Too soon to get excited
So far, we've highlighted that inflation worldwide is declining.
But what does this mean for the rest of the year? Remember, the decline across the developed countries was because of the sharp reduction in the global price of petrol caused by reduced demand.
While this is encouraging news, as our 2023 oil outlook article predicted, oil prices will likely increase, given the continued impact of Russia’s Ukraine invasion and China's reopening.
So, while the world enjoyed reduced fuel prices in December, it may not be sustained. Hence, central banks worldwide will continue increasing interest rates, at least until core inflation reduces to desired levels.
If the government removes the petrol subsidy this year as planned in Nigeria, petrol prices will only worsen for Nigerians. The World Bank estimates a 3% rise in inflation over the next two years. Also, our issues with food inflation are bound to linger, given the impact of the floods and lingering insecurity.
Without the subsidy, the impact of the energy price increase will reduce if crude oil prices decline.
However, cheaper crude reduces the government's revenue and foreign exchange earnings. With less foreign exchange, producers will continue increasing their prices as they rely on black market rates. Still, if crude prices increase, the government could earn more forex (which may reduce the impact of inflation from the currency devaluation).
In any case, the inflationary impact of higher energy costs on consumers will be severe.
Finally, there are still predictions of a global recession, which is bound to reduce foreign capital coming into emerging economies like Nigeria, making our foreign exchange crunch even worse.
So, while the world can celebrate ease in consumer wallets due to reduced inflation, we must temper optimism with caution as inflation is still a major concern.
In Nigeria, inflation will largely remain for the foreseeable future regardless of how the tide turns.
But for today, we celebrate the win of slower inflation growth. Afterall, a win is a win.
