In a surprising twist, Nigeria’s inflation rate has sharply dropped rate fell by 10.32 percentage points to 24.48 percent in January 2025 from 34.8 percent in December 2024.
The development followed the rebasing of the Consumer Price Index (CPI), according to data released by the National Bureau of Statistics (NBS).
There is a decline in the general price level of goods and services compared to 34.80% in December 2024, which was calculated using the previous methodology.
The recent rebasing of Nigeria’s CPI by the NBS significantly altered inflation metrics across the country, leaving many people wondering what caused this sudden change.
This decline is not because prices of goods and services have drastically reduced, but rather due to a technical process called Consumer Price Index (CPI) rebasing. Below is the explanation of CPI rabasing provided by the NBS.
What is CPI?
CPI (Consumer Price Index) is a measure of the average change in prices of goods and services that people buy regularly, such as food, transport, and housing. Economists use CPI to calculate inflation, which tells us how fast prices are rising over time.
One of the primary importance of CPI is that it is used to produce the country’s inflation rate. The index is also used for the determination of wages, contracts, and rent adjustments. It serves as input in formulating monetary policy.
How is CPI calculated?
The computation of CPI has two stages. The First stage is the generation of relative prices (Elementary indices). This is when the current average prices are compared with the average prices at the base year.
This will show whether the average prices of goods and services have changed or not. The second stage is the aggregation of the relative prices to obtain higher-level indices (the weighted index). This involves adding up all the changes in the average prices of a group of items obtained in stage one and multiplying them by their weights.
What is CPI Rebasing?
CPI rebasing is an exercise carried out to ensure that the methodological basis upon which the CPI is constructed is robust, logical, and consistent with global best practices. Specifically, it entails bringing the weight and price reference periods closer to the current period (i.e., current consumption pattern). This will ensure that the inflation figure reflects current inflationary pressure and consumption patterns.
What is base year or Price Reference period?
A base year or Price Reference period is the year the current prices are compared in order to measure changes in prices for CPI computation.
What factor(s) determine the choice of the reference periods?
According to the CPI Manual 2020 edition, the base year is expected to be the year before the current year. E.g., if a rebased CPI is to commence in January 2023, the base year should be 2022. Relative Price stability of the year is also a factor.
In Nigeria, 2023 was a year in which prices fully responded to shocks like Fuel Subsidy removal, Exchange rate unification, increase in electricity tariff, and other prices inducing policies. Hence, prices in 2024 were relatively stable compared to 2023.
Why is CPI base year different from GDP base year?
Although the two macroeconomic indicators have what is called a “base year”, the base year does not serve the same purpose in the two indicators. CPI is an index, that measures changes, but GDP is not an index. In CPI, the base year is the period you compare current prices to obtain changes in prices.
To obtain price changes that reflect current economic realities, the base year should not be far from the current period. For GDP, the base year is not meant to obtain changes in output, but the year in which economic activities measurement should commence from. Hence, it is not compulsory the two indicators have the same base year.
What are the benefits of CPI Rebasing?
The following are the key benefits of the CPI rebasing
1. It produces item weights that reflect the current consumption pattern of the household.
2. It produces an up-to-date CPI basket of items generally consumed within the economy
3. It produces a Consumer Price Index that reflects current price volatility.
4. Its results produce efficient input into Monetary and Fiscal policy formulation
5. Lastly, the outcome of the exercise will create room for comparability with other countries.
How often should a country Rebase?
Conventionally, the United Nations Statistical Commission (UNSC) recommends that countries rebase at least every 5 years, however, in practice, this is done every 5 to 10 years, especially in developing countries.
Why has the Nigerian CPI not been rebased since 2009?
This is for several reasons. Resource challenges have been the major factor as to why the rebasing has not been done since 2009. The process requires the conduct of a major household expenditure survey as well as data from other minor surveys and administrative sources. The enormous resource implication of these data collection activities limited NBS’s ability to conduct the exercise sooner.
What methodology was used for current Rebasing exercise?
The CPI rebasing was anchored on the 2023 Nigeria Living Standards Survey (NLSS). The survey captured general household expenditure on consumption goods and services. The survey was conducted for twelve (12) months across the 36 States and the FCT, in both Urban and Rural Areas, capturing seasonality in consumption of goods and services.
In order to have more comprehensive household expenditure data, another household expenditure survey was conducted called Survey of Rare Items (rare items are durable goods like Cars, Laptops, Solar panels, Electronics, etc, which households do not necessarily spend frequently). In addition to these surveys, data on expenditure on Financial Services and Insurance was also sourced administratively from Institutions like the Central Bank of Nigeria and the National Insurance Commission.
All of this information on general expenditure was used to develop a new CPI basket of items with corresponding individual weights, classified using the 2018 Version of the CPI classification structure called Classification of Individual Consumption According to Purpose (COICOP), which has 13 Divisions for CPI computation.
The 13 divisions are:
Food And Non-Alcoholic Beverages
Alcoholic Beverages, Tobacco, and Narcotics
Clothing and Footwear
Housing, Water, Electricity, Gas and Other Fuels
Furnishings, Household Equipment, and Routine Household Maintenance
Health
Transport
Information and Communication
Recreation, Sport and Culture
Education Services
Restaurants and Accommodation Services
Insurance and Financial Services
Personal Care, Social Protection, and Miscellaneous Goods and Services
The CPI basket is comprised of the goods and services that households purchase. It refers to a sample of goods and services, which are meant to represent the totality of all the goods and services purchased by households.
The representativeness of items in the CPI basket is crucial because inadequate representation of the items may produce a bias index. The newly developed CPI basket contains 934 varieties of products as opposed to the obsolete one which was composed in 2009 and had 746 varieties of items.
Where can I get more information about the methodology of the rebasing of the CPI?
This can be found in the final report of the 2024 CPI rebase exercise which will be published after the public release of the results.
What is the impact of CPI rebasing on inflation measurement?
Rebasing can affect the measured rate of inflation. Changes in the basket and weights can lead to different inflation figures compared to the old base year.
Does CPI rebasing mean prices are actually going up or down?
No. CPI rebasing is a statistical process. It does not directly cause prices to rise or fall. It simply provides a more accurate and up-to-date measure of price changes in the economy.
Why is it important to understand CPI rebasing?
Understanding CPI rebasing is important for interpreting inflation data and understanding how it may affect your income, benefits, and financial agreements.
Can CPI rebasing make historical inflation data incomparable?
Yes, rebasing can make it difficult to compare inflation rates across different base years. However, the Bureau often provides methods for linking data from different base years.
Does This Mean Prices Are Lower with CPI rebasing?
No, the drop in the inflation rate does not mean the cost of living has reduced. Prices of goods and services are still high, but the way inflation is measured has changed, making the numbers look different.
