As the National Bureau of Statistics (NBS) launches the rebased Consumer Price Index (CPI), EMMANUEL OMOTAYO AKANDE, Ph.D, cautions that investors and credit rating agencies rely on CPI data to assess macroeconomic stability, and any perceived inconsistencies in inflation reporting could introduce risk premiums on Nigerian assets or deter long-term investments.
In a bold move, Nigeria has rebased its Consumer Price Index (CPI) to 2024, marking a critical shift in how inflation trends are measured and interpreted. This decision is particularly significant given the economic disruptions caused by key reforms such as the removal of oil subsidies, the currency devaluation and the liberalisation of the naira, and the tax reforms.
The economy, already grappling with inflationary pressures, faced further disruptions as these policies, while necessary, deepened the financial burden on households. However, as the dust settles and the effects of these reforms cascade through the economy, important questions arise about the appropriateness of the 2024 base year for tracking inflation trends in the medium and long term.
The short-term realities: Inflation and economic hardship
The rebasing coincides with one of Nigeria’s most challenging economic periods. Households currently allocate an estimated 90 percent of their income to necessities such as food, transportation, and energy. This situation underscores the severe impact of inflation on purchasing power and overall living standards. By setting 2024 as the reference year, the new CPI is anchored to an exceptionally high price environment, capturing temporary distortions caused by economic adjustments.
A key issue here is the possibility of underestimating future inflation trends. If prices stabilise or decline in the coming years due to economic recovery, the CPI may indicate a misleading reduction in inflation. This phenomenon, known as “base effect bias,” occurs when an inflated baseline creates the illusion of improving price stability while underlying cost pressures persist.
Deflation or disinflation: The risk of false signals
A primary concern of rebasing the CPI to 2024 is the potential for misinterpreting economic trends. As the economy adjusts and inflationary pressures ease, Nigeria may experience either deflation (an actual decline in prices) or disinflation (a slowdown in inflation). While this would typically signal economic recovery, policymakers and businesses may misread these trends as indicators of economic distress.
For instance, if the CPI records deflation due to falling food and energy prices, the perception may shift towards fears of stagnation or declining demand, even when structural reforms are successfully stabilizing the economy. This misinterpretation could prompt premature or inappropriate monetary interventions, such as excessive interest rate cuts, potentially fueling inflation in the long term.
Counterfactual Analysis: Why 2019 might have been a better base year
An alternative approach would have been to rebase the CPI to 2019, a period of relative economic stability before the COVID-19 pandemic and recent policy shocks. This choice would have provided a more balanced measure of inflation, filtering out distortions introduced by the extreme conditions of 2024.
Had Nigeria chosen 2019 as the base year, inflation trends would have been measured against a more neutral economic backdrop. This would reduce the risk of generating misleading signals during recovery periods and offer a clearer distinction between inflationary trends driven by structural inefficiencies versus temporary policy shocks.
Broader economic consequences of the 2024 base year
Policy Responses and Macroeconomic Stability: The new CPI base year could influence monetary and fiscal policy decisions in unintended ways. If inflation appears to decline due to the high base effect of 2024, policymakers may interpret this as a sign of economic stabilization, potentially delaying necessary interventions. Conversely, if inflation rates appear to stabilize artificially due to a high baseline, it may result in complacency in addressing underlying economic challenges, such as fiscal deficits and structural inefficiencies.
Additionally, monetary policymakers may struggle to distinguish between true disinflation and misleading data effects, leading to premature interest rate adjustments that could either stifle economic recovery or reignite inflationary pressures.
Market Behavior and Investment Decisions: Businesses and investors rely on CPI data to make critical decisions regarding pricing strategies, wages, and capital allocation. Misleading inflation signals could distort these decisions, slowing economic recovery. Investors may also perceive an artificially low inflation rate as a sign of weak consumer demand, discouraging long-term investments. If inflation trends appear unexpectedly low due to the rebasing effect, businesses may defer essential price adjustments, wage increases, or investment plans, fearing uncertain economic conditions.
Furthermore, sectors heavily reliant on cost projections, such as real estate, manufacturing, and retail, may struggle with planning and financial forecasting if inflation indicators do not accurately reflect market realities.
Public Perception and Social Stability: In a country where public trust in economic institutions is fragile, any perceived manipulation or misinterpretation of inflation data could undermine confidence in the reform agenda. If households continue to experience rising costs while official inflation figures suggest stability or decline, skepticism towards government policies may grow, fueling social discontent. Disparities between statistical inflation trends and everyday consumer experiences can generate widespread dissatisfaction, potentially leading to protests, labour strikes, or increased demands for wage adjustments.
Moreover, given the already challenging economic conditions, the rebased CPI may be seen as an attempt to mask inflationary pressures rather than address them transparently. Such skepticism could reduce compliance with economic policies and weaken broader reform efforts.
International Comparisons and Investor Confidence: The rebasing has implications for Nigeria’s global economic standing. If 2024 is marked by an exceptionally high inflation baseline, Nigeria’s future inflation trends may appear artificially low compared to peer economies. This discrepancy could complicate international comparisons and influence foreign investor confidence, affecting capital inflows. Investors and credit rating agencies rely on CPI data to assess macroeconomic stability; any perceived inconsistencies in inflation reporting could introduce risk premiums on Nigerian assets or deter long-term investments.
Furthermore, Nigeria’s ranking in global economic reports and inflation indices could shift unexpectedly, potentially impacting access to international financing, trade agreements, and foreign direct investment.
Striking a balance: Recommendations for policymakers
Transparent Communication: The government must proactively communicate the rationale behind the rebasing decision and educate stakeholders on how to interpret inflation data in context. This should include regular briefings from the National Bureau of Statistics (NBS), public awareness campaigns, and collaboration with economic analysts to provide clarity on how the new CPI base year affects reported inflation trends. Transparency will help prevent misinformation and speculation that could disrupt market stability.
Real Income Growth Analysis: Evaluating inflation-adjusted income trends to assess the actual impact of price changes on economic well-being. By adopting a multi-metric approach, policymakers can better understand inflation dynamics beyond the CPI.
Continuous Monitoring: Policymakers must track medium- and long-term trends to ensure accurate interpretations of inflation and economic stability. This includes: Establishing a data-driven inflation tracking system that regularly analyzes price movements across key sectors; conducting quarterly economic impact assessments to evaluate the effects of major reforms on inflation trends, and reviewing whether the 2024 base year remains relevant or requires future adjustments. A dynamic approach to monitoring will prevent misinterpretations of inflation trends and allow for timely policy responses.
Stakeholder Engagement: Collaboration between the National Bureau of Statistics, the Central Bank of Nigeria, financial institutions, and independent economic analysts will be critical in refining inflation measurement methodologies. Additionally, public-private partnerships in data collection can improve transparency and the accuracy of inflation reporting. Policymakers should create an inflation advisory committee composed of government, private sector, and academic experts to guide interpreting inflation data. Involve business and labour groups in discussions to ensure that inflation trends align with wage policies and pricing decisions. Work with international financial institutions to harmonize Nigeria’s inflation reporting with global best practices, boosting investor confidence. The government can build a more robust and trusted economic framework by ensuring that all stakeholders contribute to inflation measurement and interpretation.
Rebasing Nigeria’s CPI to 2024 is a consequential decision that aligns inflation measurement with current realities. However, it also introduces significant risks, including misleading economic signals, policy missteps, and public skepticism. A cautious approach, integrating clear communication strategies and robust stakeholder engagement, will be essential to ensuring that inflation data accurately reflects Nigeria’s economic trajectory. By navigating these complexities with foresight, Nigeria can leverage the rebased CPI as a tool for informed decision-making and sustainable economic growth.
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