This has come as a reprieve to many Nigerians who have been battered by the negative effects of the seemingly perpetual and unstoppable depreciation of the naira against the dollar. One of the areas where Nigerians have felt the pangs of the weak local currency is in the prices of goods and services. Prices of everyday goods, including staple foods and household items, seemed to soar with every visit to the market. This also manifested in higher transportation costs, utility bills and other services.
This synchronized rise in the prices of goods and services with the depreciation of the naira is largely a result of the country’s huge dependence on imported goods.
A large chunk of all the products used in the country are imported, including many consumer and industrial goods like milk, sugar, petrol, vehicles, and machinery. It is unsurprising then that the prices go up as the cost of importing them becomes higher.
Even service providers, who do not directly sell imported goods, will be forced to hike their prices in such a scenario in order to remain profitable as they utilize one imported product or the other in their day-to-day operations. This creates a vicious cycle that fue
Despite the huge appreciation of the naira, prices of goods and services remain high, prompting many Nigerians to begin to wonder why inflation is still high. The economic figures released by the National Bureau of Statistics on Monday also revealed that the country’s inflation rose to 33.2% in the month of March.
There are many factors responsible for this.
First, the headline released was for the month of March when the exchange rates were still very much high
The main contributory factor is price stickiness.
Price stickiness is economic term used to describe a situation where businesses hesitate to bring down the prices of their goods and services because of the higher cost of their current inventory.
What does that implies?
Many of the commodities in circulation today were imported or produced when the exchange rate of the dollar to the dollar was very high. It is usually when they finish selling their old stock and import or manufacture new products that the prices will begin to adjust, all things being equal.
This enable prevent losses and cut into their profit margins if they sell at a rate lower than the original cost price.
Another reason why the prices of goods and services are still high is psychology, or uncertainty that the naira’s strengthening against the dollar is temporary and the currency may depreciate again in the near future. In simple terms, if businesses suspect that the naira may weaken against the dollar very soon , they will be reluctant to reduce the prices too soon. This waiting game will further delay the reduction in consumer prices in the meantime.
For businesses in the service industry that do not sell physical products, additional considerations like high operating cost can contribute to price stickiness.
Many service providers rely on imported goods and equipment for their daily operations, from office supplies and cleaning materials to tech hardware.
Wages and salaries adjusted upwards when the naira was weaker may also not be reduced even with the stronger naira. Reducing salaries is a delicate and controversial move that can dampen workers’ morale. Keeping the salaries and overhead costs high while reducing the prices of the services provided can squeeze the profit margins of these businesses.
All in all, the effects of naira’s appreciation may take some time to trickle down to consumer prices due to some of the factors pointed out above.
Businesses typically factor in not just the current exchange rate, but also their past purchases, the overall cost of production and future uncertainty. While a stronger naira is a welcome development, Nigerians might need to be patient for its full impact to be felt by consumers.