CPI, Poverty And The Romance In Between

Consumer prices rose in Nigeria during the month of February 2022, according to data from the Nigerian Bureau of Statistics (NBS), which is in charge of collecting important information about changes in the country's economy and a few other things.

The orgainzation that has helped businesses, non-profit organizations, government parastatals, ministries, and governments at all levels make smart decisions said that the CPI went up more than 10 basis points from 15.60 percent in January 2022 to 15.70 percent in February 2022, which is a big change.

The surprising thing wasn’t the increment but the rate of increase, which was rather disappointing as many analysts and people within and outside the country expected the rate to be much higher.

The reasons for the skepticism and mixed reactions following the release of the figure wouldn't be far away, as events in the country and other parts of the world suggest otherwise.

From the ongoing war between Russia and Ukraine to the unresolved fuel scarcity situation in the country, others include the threat by aviation companies to suspend flights following the rapid rise in the price of aviation fuel; a recent occurrence, the astronomical record high price of diesel (N750/liter) and the attendant consequences.

Many are perhaps shocked that the figure didn’t capture all these changes so that a true reflection of the country’s sinking ship could be presented.

This article is an attempt to show the unhealthy relationship between the CPI and poverty, using Nigeria as a case study.

Firstly, the CPI is an economic term used to describe the rate at which the prices of goods and services consumed by people for survival change over a period of time.

According to the NBS, the CPI measures the average change over time in the prices of goods and services consumed by people for day-to-day living.

The agency went further to state that "the construction of the CPI combines economic theory, sampling, and other statistical techniques using data from other surveys to produce a weighted measure of average price changes in the Nigerian economy."

Economists, statisticians, computer scientists, data analysts, business intelligence experts, and others work together to get a handle on certain goods, like food that is important.

Key in the construction of the price index is the selection of the market basket of goods and services.

"Every month, 10,534 informants spread across the country provide price data for the computation of the CPI.

"The market items currently comprise 740 goods and services regularly priced, "the statement from the NBS read.

Accordingly, the agency explained that "the first stage in the calculation of the CPI is the collection of prices on each item (740 goods and services) from outlets in each sector (rural or urban) for each state.

"Prices are then averaged for each item per sector across the state."

The next step is to use the average price to calculate the basic index for each commodity: the current year's price of each commodity is compared with a base year's price to obtain a relative price.

Next, we use the Laspeyres formula to make an aggregated index for each class, which has a lot of goods that are used for the same things.

It's also possible that many people won't understand how they came to their conclusion.

The Report

On a year-over-year basis, the CPI, also known as the inflation rate, increased to 15.70 percent in February 2022.

This is 1.63 percent lower compared to the rate recorded in February 2021 (17.33 percent).

This means that the headline inflation rate slowed down in February when compared to the same month in the previous year.

The NBS statement reads as follows:

"The reduction in percentage terms from 17.33% to 15.70% signified a less negative shift when compared to February, 2021.

"Some economists may argue that this was as a result of the shocks to the system caused by the COVID-19 lockdowns.

"Increases were recorded in all COICOP divisions that yielded the headline index.

"On a month-to-month basis, the headline index increased to 1.63 percent in February 2022, this is 0.16 percent rate higher than the rate recorded in January 2022 (1.47) percent.

"The percentage change in the average composite CPI for the twelve months’ period ending February 2022 over the average of the CPI for the previous twelve months’ period was 16.73 percent, showing 0.14 percent point from 16.87 percent recorded in January 2022. 

"The urban inflation rate increased to 16.25 percent (year-on-year) in February 2022 from 17.92 percent recorded in February 2021, while the rural inflation rate increased to 15.18 percent in February 2022 from 16.77 percent in February 2021.

"On a month-on-month basis, the urban index rose to 1.65 percent in February 2022, up by 0.12 the rate recorded in January 2022 (1.53) percent, while the rural index also rose to 1.61 percent in February 2022, up by 0.19 the rate that was recorded in January 2022 (1.42) percent.

"The twelve-month year-on-year average percentage change for the urban index is 17.29 percent in February 2022.

"This is lower than the 17.44 percent reported in January 2022, while the corresponding rural inflation rate in February 2022 is 16.18 percent, which is lower than the 16.31 percent recorded in January 2022," it concluded.

The Relationship between CPI and Poverty

We have defined CPI as a measure of the rate of change in the prices of everyday goods and services that people depend on for survival.

Poverty, on the other hand, is a reflection of the economic and financial state or position of an individual, group, community, state, or country during a given period of time.

Poverty is a reflection of the buying power of the majority of the people in a given country.

In economic terms, poverty can be viewed through the eyes of the national income of a given country.

If the national income is high, let’s say an average income of $1,000/month, we can say that the majority of the population is way above the poverty level and is doing well.

There is a likely tendency that things are relatively cheaper because most people can afford those basic things of life.

On the other hand, if most people in a particular country are living under $50/month, we can almost conclude that the majority of people are living below the poverty line and are not doing well.

Since Nigeria is our focus point, we understand from the data above and data from other sources that the majority of people are living way below the poverty line.

After all, it is a known fact that Nigeria used to be the poverty capital of the world until it relinquished that position to India recently. 

Reasons

The falling naira: The naira has been on a steady decline for months now.

Since the CBN discontinued the disbursement of dollars to the BDCs, which many saw as a good exchange rate policy, the naira has continued to fall in all exchange markets, with the parallel market the worst hit.

In the government-controlled exchange markets, i.e., the I & E window and the interbank market, the rate of depreciation was less vocal than that of the parallel market.

The parallel market has crashed badly from N350/USD to N580/USD in less than nine months, a value decline of more than 50%.

The simple reason is that we are an import-dependent economy, so the demand for foreign exchange to continue importation worsens with the widening of the gap caused by the elimination of supply to the BDCs (Bureau de Change).

The basic law of demand and supply states that when demand exceeds supply, the price will increase.

The price of US dollars skyrocketed only with a short-term solution of the CBN, such as the direct supply of US dollars to the commercial banks, the naira for dollars’ initiative to encourage over-the-counter withdrawals, and several others, did the situation improve a bit.

Now, the effect is that the price of most food and non-food items went up because dollars went up.

Vegetable oil, rice, frozen chicken and turkey, wheat, flour, and many others followed the rise in the price of the dollar.

Unfortunately, the more expensive things become, the greater the number of families that drop into the poverty club.

According to the NBS, more than 80% of Nigerians fall below the poverty line. And the simple reason for this is that incomes are not growing in both real and nominal terms, while prices are escaping to another realm, leaving the majority of Nigerians in misery and anguish.

Other reasons responsible for this high inflation rate include insecurity across the nation.

With everything from insurgents in the northeast to banditry in the northwest, farmers and herders fighting in the north-central, unknown gunmen and IPOB operations in the southeast, and a wide range of other problems.

Nigeria is facing a lot of different problems at the same time right now. This ugly situation has affected not only the price of basic foodstuffs, as both their production, transportation, and distribution have been badly affected.

Prices for these items have risen to the point where some say that what the average person could afford are now out of reach.

Present income struggles to cope with these changes, which has led many to engage in unhealthy rationing. 

In conclusion, the above is just a small example of how connected the CPI/inflation rate and poverty are connected.

We understand that both parameters have a direct relationship.

If the CPI/inflation rate rises, poverty is definitely going to rise at a much higher pace, all things being equal.

On the other hand, if the inflation rate falls, poverty will definitely fall.

The above is why policymakers are very much interested in the CPI data because it helps them design policies that can help address these challenges.