As the Naira continues its upward trajectory, many have expected to see a corresponding dip in consumer goods prices. However, the reality on ground tells a different story. Theoretically, a stronger Naira should translate into lower import costs and, eventually, reduced consumer prices. Yet, the delay in this anticipated outcome raises questions about the underlying dynamics at play. Here are some key factors to consider:

Time Lag: One factor contributing to this delay is the time it takes for exchange rate adjustments to filter through to consumer prices. Businesses may exercise caution in adjusting prices, waiting for sustained currency appreciation before passing on cost savings to consumers.

Structural Issues: Structural issues such as high transportation costs and distribution inefficiencies may act as barriers to price reductions.

Speculative pricing: Businesses may adopt a cautious approach, fearing future currency fluctuations and opting to maintain prices at current levels, a phenomenon commonly referred to as “sticky prices.”

However, it’s worth noting that while prices haven’t yet decreased, we’re observing a slower rate of increase. The month-on-month inflation figures for March indicate a lesser rise in the average price level compared to February 2024. Headline inflation for March 2024 stood at 3.02%, a 10 basis points decrease from February, while food inflation was 3.62%, showing a 17 basis points decrease. This trend is expected to continue in the upcoming months.

It is also important to consider the base effect in the year-on-year figures. Considering that consumer prices were already high before the Naira appreciation occurred in the last two months (headline and food inflation stood respectively at 29.90% and 35.41% in January vs 33.20% and 40.01% in March), the decrease (or drop in the rate of increase) in prices might seem less significant.

In addition to recent improvement in the strength of the Naira, policies that can help achieve sustainable price stability lies largely with the fiscal authority. Below are some of the policies that should be prioritised:

1. Structural Reforms: Addressing structural bottlenecks in the economy, like improving transportation infrastructure and reducing bureaucratic hurdles, can make businesses more efficient and potentially lower production costs. This will translate to lower consumer prices.
2. Focus on Domestic Production of Competitive Advantageous Products: Implementing policies that incentivize local production of essential goods will lessen reliance on imports and make prices less vulnerable to fluctuations.