Middle East war could reverse disinflation trend - CPPE

The Centre for the Promotion of Private Enterprise (CPPE) has warned that the rising global oil prices, driven by the US/Israel and Iran conflict, could undermine Nigeria’s disinflation trend.

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The CPPE also stated that the easing of inflation in February reflects only a slower price increase, not a reduction in the cost of living or an improvement in business profitability.

On Monday, the National Bureau of Statistics (NBS), in its February CPI report, stated that the country’s headline inflation eased to 15.06 per cent, down from 15.10 per cent in January and 26.27 per cent a year earlier.

The report also revealed that the food inflation rose to 12.12 per cent, up from 8.89 per cent recorded in January.

In a statement issued on Sunday, the CPPE, reacting to the NBS inflation report, noted that the improvement in headline inflation is fragile and does not yet signal a decisive turnaround in price dynamics.

According to the think tank, transport and energy costs continue to rise at a pace that erodes purchasing power. At the same time, real incomes remain under severe strain, particularly for vulnerable and urban households.

For SMEs, the CPPE noted that their operating environment remains extremely challenging, with high energy, logistics, and raw material costs, weak consumer demand limiting pricing flexibility, and increasing business vulnerabilities.

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Energy shock

The firm argued that the war in the Middle East, involving the US/Israel and Iran, which has led to the rising global oil prices, is a threat to the inflation outlook.

By Day 23, the war has triggered a surge in crude oil prices above $100 per barrel, driven by heightened risks to global supply routes, including the Strait of Hormuz.

The CPPE warned that if higher petrol and diesel prices, rising transportation and logistics costs, increasing production costs across sectors, renewed exchange rate pressures, and escalating food prices driven by input and distribution costs persist, the current disinflation trend could be reversed.

The think tank further explained that structural weaknesses in the domestic economy intensify Nigeria’s exposure to energy-driven inflation.

It noted that heavy reliance on petrol and diesel power generation, due to unreliable electricity supply, creates a strong and immediate pass-through from global oil prices to domestic inflation.

“Estimates indicate that unreliable electricity imposes annual economic losses of between N7 trillion and N10 trillion, while spending on generators exceeds N3.7 trillion annually.

“This structural dependence means that energy price shocks quickly translate into higher production costs, transport costs, and general price levels across the economy,” the CPPE stated.

Solutions

The CPPE advised the government to focus on strengthening domestic refining capacity by providing a stable, reliable crude oil supply to local refineries, including the Dangote refinery, under supportive, predictable, and, where feasible, concessionary terms.

The agency explained that strengthening domestic refineries is crucial for moderating domestic fuel prices, easing pressure on foreign exchange demand, and enhancing the country’s energy security.

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It further advised the government to scale up investment in efficient and affordable public transportation systems as a key social protection measure, noting that easing the transport cost burden would provide immediate relief to households.

The think tank advocated removing fiscal barriers to renewable energy, suspending maritime charges, and increasing electricity supply nationwide to contain the energy cost crisis.

“In addition, fiscal barriers to renewable energy adoption should be removed. Waivers on import duties and taxes on solar equipment, inverters, and batteries would accelerate the transition to alternative energy sources and reduce dependence on expensive fossil-fuel-based self-generation.

“Additionally, all maritime charges should be suspended to ease the escalating shipping cost amidst the sharp increase in marine insurance globally.

“More fundamentally, there is an urgent need to improve the electricity supply. “Reliable power remains the most effective long-term solution to Nigeria’s energy cost crisis. Strengthening generation, transmission, and distribution infrastructure, alongside support for decentralized energy solutions, would significantly reduce production costs and inflationary pressures,” the CPPE said.

The CPPE also advised businesses to adopt flexible and remote work arrangements to reduce commuting costs and mitigate the welfare impact of rising fuel prices.

It added that monetary and fiscal authorities must remain cautious and disciplined, noting that the resurgence in monthly inflation and the emergence of external shocks suggest that premature policy easing would be risky.

“Oil revenue windfalls should be managed prudently, with emphasis on strengthening foreign exchange reserves and supporting productive sectors of the economy,” the CPPE stated.