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US producer price inflation slips to 7.4%

As we all await the widely anticipated Nigerian inflation data next week, analysts could not ignore the news this afternoon that the U.S. producer price inflation fell again to 7.4%. The news roiled global stock markets because expectations were that it would fall to 7.2%. The hotter-than-expected inflation rate has heightened the fear that the Fed may not slow down on its rate hikes. In other words, the hawks may be in control of monetary policy for now.  The markets were earlier surprised by the job report which showed that the US economy created 263,000 non-farm jobs in November, against an expectation that nonfarm payroll will shrink to 200,000. This reflects the tightness of the labour market, suggesting that the economy may still be overheated. Although the Fed may remain hawkish in 2023, it is most likely that the US will dodge the recession bullet after contracting for two consecutive quarters in 2022.

Is the End of Global spiraling Inflation Imminent?

Instead of declining as quickly as major central banks had anticipated, inflation has soared more dramatically, and persistently around the world. This prompted most central banks to ditch the loose monetary regime of the COVID era for monetary tightening. About top ten central banks including the US have raised policy rates by a total of 2,000bps. Ghana and Nigeria have also raised rates by 1000bps and 500bps respectively. But inflation seems to be defying the already aggressive stance being taken by policymakers to bring it under control. Except in the US and a few other economies where inflation has begun to show signs of moderation, it remains elevated or even escalating in most countries where it has hit multi-decade highs. Indeed, it does appear that most economies will have to cope with both high inflation and restrictive monetary policy for a longer time.

Exchange rates convergence precede unification

Exchange rate unification is a noble goal. However, this could be a hard choice. Indeed, Nigeria’s multiple exchange rate system has become a minefield. One of the problems associated with a multiple exchange rates system is that it creates distortions in the economy by altering relative prices. It also gives individuals who have access to preferred rates the chance to engage in a rent-seeking activity. It is also an implicit tax on the government and this could put a substantial strain on government revenue. Year-to-date, the naira has depreciated by over 24% in the autonomous market and this has significantly widened the premium between the official and parallel market rates. With the risks of dollarization, capital flow reversals, and suppressed remittance inflow on the rise, there is an urgent need to retool the nation’s exchange rate system. The hard choice must be made and the “how” questions are answered in this edition of FDC Economic Bulletin.

In this edition of the FDC Bi-monthly publication, Nigeria’s economic performance in Q3’22, exchange rate crisis, deforestation and climate change, the ongoing global shocks and several other domestic and global economic events are discussed in detail.

Do enjoy your read!