Nigeria's Inflation Rate Drops After Key Formula Change

Nigeria’s annual inflation rate fell in December, but not because prices dropped. The decline was the result of a crucial change in how the government calculates its consumer price index, a move designed to prevent a misleading statistical surge.

The National Bureau of Statistics (NBS) reported on Thursday that consumer prices rose 15.2% in December, a decrease from 17.3% in November. This figure was calculated using a revised methodology. Without the adjustment, the agency projected that inflation would have appeared to spike to 31.2%.

The statistics office clarified that the change was necessary to correct a "base effect" that did not reflect actual price movements in the economy.

Explaining the Shift in Inflation Calculation

The statistical distortion stemmed from Nigeria’s recent rebasing of its Consumer Price Index (CPI). To avoid an "artificial spike," the NBS used a 12-month average reference period for its year-on-year calculation, setting the average CPI for 2024 as the baseline of 100.

This new approach replaced a single-month method that would have used December 2024 as the base.

In its statement, the NBS noted the spike was "methodological, not structural, resulting in a rate that is not in tandem with current inflationary realities." The agency emphasized the need to switch to the 12-month index reference period for a more accurate picture.

The Root Cause: A Long-Overdue CPI Update

The methodological challenge arose after the statistics agency updated its CPI framework for the first time in 16 years. This major overhaul included:

• Reweighting categories to reflect modern consumption patterns.

• Expanding the basket of goods and services from 740 to 934 items.

• Resetting the reference year to 2024.

Ayo Andrew, head of price statistics at the NBS, explained earlier in the week that the long delay in updating the basket, combined with the large number of new items, created the calculation problem.

Central Bank Calls It a "Mathematical Glitch"

Officials have been quick to reassure stakeholders that the adjustment is a technical correction, not a reflection of a sudden change in economic conditions.

Speaking to Bloomberg, Muhammad Sani Abdullahi, Deputy Governor for Economic Policy at the Central Bank of Nigeria (CBN), described the situation as a "purely mathematical issue."

"NBS has extensively engaged with all stakeholders to really understand that there's a mathematical glitch," he said at an economic conference in Lagos. "It's not that prices are higher."

Impact on Future Monetary Policy

This statistical clarification comes as the CBN transitions to an inflation-targeting framework, with a goal of slowing price growth to 13% next year. The bank's monetary policy committee held the benchmark interest rate at 27% in November and is scheduled to announce its next decision on February 24.

Finance Minister Wale Edun suggested this week that if disinflation continues, the central bank may soon cut interest rates. Such a move would reduce government debt servicing costs and ease pressure on public finances, which have been strained by volatile oil prices.