## sipea2026044

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---

### A. Nigeria’s Inflation Over Time
- Historically driven by supply-side shocks, deficit financing, and large exchange rate depreciation.
- Early 2000s: volatile, double-digit inflation due to food price shocks, exchange rate pressure, and fiscal dominance.
- 2010–2016: inflation stabilized near 10 percent under managed exchange rates and improved macro stability.
- 2016: oil price shock and exchange rate adjustment led to renewed rise in inflation and higher persistence.
- 2020–22: inflation accelerated amid COVID disruptions and loose policies with significant monetary financing.
- 2023: sharp rise in inflation following unification of exchange rate windows, substantial exchange rate depreciation, and removal of fuel subsidies; monetary tightening lagged by six months.
- 2024–25: inflation peaked with strong exchange rate pass-through and high fuel and food prices.
- Recent period: tighter monetary policy and greater exchange rate stability have helped moderate inflation, though it remains high.
- Figure referenced: Headline, Core and Food Inflation, 2001-25 (National Bureau of Statistics).

### B. Composition of Inflation
- 2025 CPI rebasing altered basket composition significantly:
  - Food weight declined sharply—from over 50 percent prior to rebasing to about 28 percent.
  - Non-food components such as housing, transport, and other services increased their weights.
  - Rebasing mechanically contributed to a downward shift in measured headline inflation in 2025, particularly via lower measured food inflation.
- Historical contributions (April 2003–December 2024):
  - Food contributed 53.6 percent to the average headline inflation rate of 14.4 percent.
  - Food weight was 63.7 percent up to 2010, 50.7 percent until the 2025 rebasing, then 28.0 percent after rebasing.
- 2025 contributions:
  - Due to lower weight and lower measured food inflation, food’s contribution stood at 24.5 percent of the 23.3 percent headline inflation in 2025.
- Domestic vs international food prices:
  - Nigeria imports about 30 percent of consumed food.
  - Domestic food price spikes do not consistently coincide with international food price spikes and often move in the opposite direction.
  - Domestic food inflation remains persistently high after international food prices moderate, reflecting climate events (e.g., severe drought of 2022/23 and widespread flooding in 2024) and fuel-related transport cost impacts (one quarter of retail food prices reflect on transport cost).
- Other component contributions:
  - Large depreciation episodes (notably 2016 and around 2023) raised local-currency cost of imported inputs, increasing contributions from transport, housing-related items (including energy and utilities), and other market-based services.
- Figures referenced: Average Contributions to Inflation; Domestic and International Food Price Inflation; Contributions to CPI Inflation.

### C. Persistence
- Methodology:
  - Persistence index obtained by estimating an AR(1) process and averaging the estimated coefficient with a 48-month rolling window.
- Pre-unification persistence:
  - Prior to the exchange rate reforms of 2023, persistence hovered near 1.0 after the June 2016 depreciation, indicating an entrenched, near-unit-root inflation process.
- Cross-country benchmarks:
  - WAEMU historical average persistence index: 0.2, rising temporarily to 0.55 during the 2021–22 global commodity price shock.
  - CEMAC implied persistence coefficient range: between 0.87 and 0.92, baseline 0.868 (from a hybrid Phillips curve estimated over 2001–2022).
- Post-unification evolution:
  - Since June 2023 exchange rate unification, Nigeria’s persistence declined steadily, falling from about 1.0 to 0.1 by early 2026.
  - Primary drivers of decline: exchange rate unification, global moderation in food and energy commodity prices from 2022 peaks.
  - 2025 CPI rebasing contributed to a downward shift in the measured inflation intercept and could mechanically reduce the estimated AR(1) persistence coefficient, but the decline in persistence began in mid-2023—before the rebasing—indicating rebasing reinforced but did not drive the structural change.
- Policy implication:
  - Shocks are less entrenched and price dynamics are more responsive to market adjustments and monetary tightening, supporting a transition toward a more forward-looking, inflation-targeting framework.
- Figure referenced: Headline Inflation Persistence, 2004-25 (48-month rolling AR(1) coefficient).

### D. Diffusion
- Definition:
  - Diffusion index = share of CPI items exceeding specified inflation thresholds; measures breadth and spread of inflationary pressures across components.
- Recent trend:
  - Breadth and propagation of inflationary pressures have been declining since end-2024.
  - Since end-2025, diffusion measures have eased, with more than half of CPI components falling below the 20 and 25 percent inflation thresholds.
  - Nonetheless, still more than half of items remain above 15 percent inflation, indicating price pressures, though moderating, remain broad-based.
- Policy implication:
  - Securing durable disinflation requires sustained policy credibility and continued macroeconomic discipline.
- Figure referenced: Diffusion Index (percentage of the total 13 subcomponents above three thresholds).

### E. Expectations
- CBN inflation expectations survey restart:
  - Shows a downward trend from December 2024.
  - Share expecting higher inflation declined to 28 percent at end 2025, from an average of 54 percent in the second half of 2024.
  - Share expecting lower inflation remained broadly stable.
  - Percentage of respondents “not sure” increased from 27 percent in the second half of 2024 to 42 percent in December 2025.
- Interpretation:
  - High inflation is no longer seen as the norm; this reduces risk of shocks becoming self-perpetuating and highlights greater sensitivity to policy credibility.
  - Provides a path for policy to play a greater role in shaping expectations.
- Figure referenced: Inflation and Expectations.

### F. Conclusion and Policy Recommendations
- Reforms and policy tightening have altered Nigeria’s inflation dynamics:
  - Decline in inflation persistence since the 2023 exchange rate reform.
  - Gradual easing in breadth of inflationary pressures as seen in diffusion indicators and survey-based measures.
  - Rising importance of transport, housing, and exchange rate-sensitive components alongside the historically dominant role of food.
  - 2025 CPI rebasing materially changed measured composition and reduced food’s weight from over 50 percent to about 28 percent, mechanically lowering measured headline inflation in 2025.
- Policy recommendations to sustain durable disinflation:
  - Continued tight monetary policy.
  - Credible FX market functioning.
  - Macro-fiscal discipline and strong coordination between fiscal and monetary authorities.
  - Clear communication to anchor expectations and support transition toward a forward-looking, inflation-targeting framework.
- Key exact figures:
  - Average headline inflation decline to 23.3 percent from 29.9 percent in 2024.
  - Monetary Policy Rate (MPR) increased cumulatively by over 800 basis points: from 18.5 percent in February of 2024 to 26.75 percent in July 2024.
  - Cash Reserve Ratio (CRR) raised to 50 percent.
  - Food contribution historically: 53.6 percent (April 2003–December 2024) to average headline inflation of 14.4 percent.
  - Food contribution to 2025 headline inflation: 24.5 percent of the 23.3 percent headline rate.
  - Food weight changes: 63.7 percent up to 2010; 50.7 percent until 2025 rebasing; 28.0 percent after 2025 rebasing.
  - Persistence index fell from about 1.0 pre-2023 to 0.1 by early 2026.
  - Nigeria imports about 30 percent of consumed food.
  - One quarter of retail food prices reflect on transport cost.
  - Diffusion index: more than half of CPI components fell below 20 and 25 percent thresholds since end-2025, but more than half remain above 15 percent inflation.

### Section 2 — Additional Findings and Cautions
- Inflation Expectations and Caution:
  - "While this is encouraging given that the CBN has not set an official inflation target to guide expectations, these developments should be interpreted with caution as they could also reflect backward-looking expectations."
- Findings on inflation dynamics:
  - Inflation in Nigeria is becoming less persistent and more responsive to monetary policy action.
  - Shift driven by exchange rate unification, improved market mechanisms, and a tighter monetary stance.
  - Notable decline in inflation persistence and narrowing of price pressures since mid-2023.
- Policy implications reiterated:
  - Positive trends provide an opportunity for monetary policy to play a greater role in anchoring expectations and promoting price stability.
  - Achieving durable disinflation will require sustained macroeconomic discipline, enhanced policy credibility, and strong coordination between fiscal and monetary authorities.
  - Maintaining a credible and tight monetary policy stance, supported by clear communication, will be critical to safeguard disinflation gains and support Nigeria’s transition toward a forward-looking, inflation-targeting framework.

*Source: IMF Selected Issues Paper (SIP/2026/044), “Inflation in Nigeria: A Descriptive Analysis of Recent Developments,” Prepared by Reginald Darius, Cecilia Melo Fernandes, and Chris Stumphius; completed May 7, 2026.*

### Section 1

### Inflation in Nigeria: A Descriptive Analysis of Recent Developments

### A. Nigeria’s Inflation Over Time
- Historically driven by supply-side shocks, deficit financing, and large exchange rate depreciation.
- Early 2000s: volatile, double-digit inflation due to food price shocks, exchange rate pressure, and fiscal dominance.
- 2010–2016: inflation stabilized near 10 percent under managed exchange rates and improved macro stability.
- 2016: oil price shock and exchange rate adjustment led to renewed rise in inflation and higher persistence.
- 2020–22: inflation accelerated amid COVID disruptions and loose policies with significant monetary financing.
- 2023: sharp rise in inflation following unification of exchange rate windows, substantial exchange rate depreciation, and removal of fuel subsidies; monetary tightening lagged by six months.
- 2024–25: inflation peaked with strong exchange rate pass-through and high fuel and food prices.
- Recent period: tighter monetary policy and greater exchange rate stability have helped moderate inflation, though it remains high.
- Figure reference: Headline, Core and Food Inflation, 2001-25 (National Bureau of Statistics).

### B. Composition of Inflation
- 2025 CPI rebasing altered basket composition significantly:
  - Food weight declined sharply—from over 50 percent prior to rebasing to about 28 percent.
  - Non-food components such as housing, transport, and other services increased their weights.
  - Rebasing mechanically contributed to a downward shift in measured headline inflation in 2025, particularly via lower measured food inflation.
- Historical contributions (April 2003–December 2024):
  - Food contributed 53.6 percent to the average headline inflation rate of 14.4 percent.
  - Food weight was 63.7 percent up to 2010, 50.7 percent until the 2025 rebasing, then 28.0 percent after rebasing.
- 2025 contributions:
  - Due to lower weight and lower measured food inflation, food’s contribution stood at 24.5 percent of the 23.3 percent headline inflation in 2025.
- Domestic vs international food prices:
  - Nigeria imports about 30 percent of consumed food.
  - Domestic food price spikes do not consistently coincide with international food price spikes and often move in the opposite direction.
  - Domestic food inflation remains persistently high after international food prices moderate, reflecting climate events (e.g., severe drought of 2022/23 and widespread flooding in 2024) and fuel-related transport cost impacts (one quarter of retail food prices reflect on transport cost).
- Other component contributions:
  - Large depreciation episodes (notably 2016 and around 2023) raised local-currency cost of imported inputs, increasing contributions from transport, housing-related items (including energy and utilities), and other market-based services.
- Figures referenced: Average Contributions to Inflation; Domestic and International Food Price Inflation; Contributions to CPI Inflation.

### C. Persistence
- Persistence index methodology:
  - Obtained by estimating an AR(1) process and averaging the estimated coefficient with a 48-month rolling window.
  - Captures the degree to which past inflation shapes current and future price formation.
- Pre-unification persistence:
  - Prior to the exchange rate reforms of 2023, persistence hovered near 1.0 after the June 2016 depreciation, indicating an entrenched, near-unit-root inflation process.
- Cross-country benchmarks:
  - WAEMU historical average persistence index: 0.2, rising temporarily to 0.55 during the 2021–22 global commodity price shock.
  - CEMAC implied persistence coefficient range: between 0.87 and 0.92, baseline 0.868 (from a hybrid Phillips curve estimated over 2001–2022).
- Post-unification evolution:
  - Since June 2023 exchange rate unification, Nigeria’s persistence declined steadily, falling from about 1.0 to 0.1 by early 2026.
  - Primary drivers of decline: exchange rate unification, global moderation in food and energy commodity prices from 2022 peaks.
  - 2025 CPI rebasing contributed to a downward shift in the measured inflation intercept and could mechanically reduce the estimated AR(1) persistence coefficient, but the decline in persistence began in mid-2023—before the rebasing—indicating rebasing reinforced but did not drive the structural change.
- Policy implication: shocks are less entrenched and price dynamics are more responsive to market adjustments and monetary tightening, supporting a transition toward a more forward-looking, inflation-targeting framework.
- Figure referenced: Headline Inflation Persistence, 2004-25 (48-month rolling AR(1) coefficient).

### D. Diffusion
- Diffusion index definition:
  - Share of CPI items exceeding specified inflation thresholds; measures breadth and spread of inflationary pressures across components.
- Recent trend:
  - Breadth and propagation of inflationary pressures have been declining since end-2024.
  - Since end-2025, diffusion measures have eased, with more than half of CPI components falling below the 20 and 25 percent inflation thresholds.
  - Nonetheless, still more than half of items remain above 15 percent inflation, indicating price pressures, though moderating, remain broad-based.
- Policy implication: securing durable disinflation requires sustained policy credibility and continued macroeconomic discipline.
- Figure referenced: Diffusion Index (percentage of the total 13 subcomponents above three thresholds).

### E. Expectations
- CBN inflation expectations survey restart:
  - Shows a downward trend from December 2024.
  - Share expecting higher inflation declined to 28 percent at end 2025, from an average of 54 percent in the second half of 2024.
  - Share expecting lower inflation remained broadly stable.
  - Percentage of respondents “not sure” increased from 27 percent in the second half of 2024 to 42 percent in December 2025.
- Interpretation:
  - High inflation is no longer seen as the norm; this reduces risk of shocks becoming self-perpetuating and highlights greater sensitivity to policy credibility.
  - Provides a path for policy to play a greater role in shaping expectations.
- Figure referenced: Inflation and Expectations.

### F. Conclusion
- Reforms and policy tightening have altered Nigeria’s inflation dynamics:
  - Decline in inflation persistence since the 2023 exchange rate reform.
  - Gradual easing in breadth of inflationary pressures as seen in diffusion indicators and survey-based measures.
  - Rising importance of transport, housing, and exchange rate-sensitive components alongside the historically dominant role of food.
  - 2025 CPI rebasing materially changed measured composition and reduced food’s weight from over 50 percent to about 28 percent, mechanically lowering measured headline inflation in 2025.
- Overall policy message:
  - Sustaining durable disinflation will require continued tight monetary policy, credible FX market functioning, and macroeconomic discipline, especially amid recent global commodity price shocks.
- Key exact figures highlighted:
  - Average headline inflation decline to 23.3 percent from 29.9 percent in 2024.
  - Monetary Policy Rate (MPR) increased cumulatively by over 800 basis points: from 18.5 percent in February of 2024 to 26.75 percent in July 2024.
  - Cash Reserve Ratio (CRR) raised to 50 percent.
  - Food contribution historically: 53.6 percent (April 2003–December 2024) to average headline inflation of 14.4 percent.
  - Food contribution to 2025 headline inflation: 24.5 percent of the 23.3 percent headline rate.
  - Food weight changes: 63.7 percent up to 2010; 50.7 percent until 2025 rebasing; 28.0 percent after 2025 rebasing.
  - Persistence index fell from about 1.0 pre-2023 to 0.1 by early 2026.
  - Nigeria imports about 30 percent of consumed food.
  - One quarter of retail food prices reflect on transport cost.
  - Diffusion index: more than half of CPI components fell below 20 and 25 percent thresholds since end-2025, but more than half remain above 15 percent inflation.

*Source: IMF Selected Issues Paper (SIP/2026/044), “Inflation in Nigeria: A Descriptive Analysis of Recent Developments,” Prepared by Reginald Darius, Cecilia Melo Fernandes, and Chris Stumphius; completed May 7, 2026.*

### Section 2

### sipea2026044 - Section 2

### Inflation Expectations and Caution
- "While this is encouraging given that the CBN has not set an official inflation target to guide expectations, these developments should be interpreted with caution as they could also reflect backward-looking expectations."

### Findings on Inflation Dynamics
- Inflation in Nigeria is becoming less persistent and more responsive to monetary policy action.
- This shift reflects the impact of:
  - exchange rate unification,
  - improved market mechanisms, and
  - a tighter monetary stance.
- These factors have contributed to a notable decline in inflation persistence and a narrowing of price pressures since mid-2023.
- Figure referenced: "Figure 8. Nigeria: Inflation and Expectations" (Sources: CBN, National Bureau of Statistics).

### Policy Implications and Recommendations
- Looking ahead, positive trends provide an opportunity for monetary policy to play a greater role in anchoring expectations and promoting price stability.
- Achieving durable disinflation will require:
  - sustained macroeconomic discipline,
  - enhanced policy credibility, and
  - strong coordination between fiscal and monetary authorities.
- Maintaining a credible and tight monetary policy stance, supported by clear communication, will be critical to:
  - safeguard disinflation gains, and
  - support Nigeria’s transition toward a forward-looking, inflation-targeting framework.

*Source: sipea2026044 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026044.pdf_