Inflation: Money Supply Rises By 22.5% To N38trn
The increasing demand for cash by members of the public to meet the rising prices of goods and services has caused money supply in the economy to jump by 22.5 per cent Year-on-Year (YoY) to N38 trillion in the first quarter of the year (Q1’21).
Reflecting the rising trend in prices of goods and services, the annual inflation rate rose for the 19 consecutive months to 18.17 percent in March according to data by the National Bureau of Statistics (NBS). This represents the highest inflation rate since January 2017.
The persistent rise in the inflation rate is mostly attributed to increase in food prices. The annual food inflation rate rose steadily to 23 per cent in March this year from 13.28 per cent in October 2018, reflecting the impact of low harvest due to continued farmer-herders’ crises and the volatility in logistics cost as well as the impact of border closure that lasted from August 2019 to December 2020.
Other factors driving the steady increase in prices of goods and services include: naira depreciation, increase pump price of petroleum products and electricity tariff.
However, the persistent increase in inflation means that consumers need more money to purchase the same quantity of goods and services, a situation that usually leads to increased demand for money and hence increase in money supply.
This development is confirmed by Economic Confidential analysis of data on Credit and Money supply for Q1’21 released by the Central Bank which showed that Broad Money supply (M2) rose by 22.5 per cent, YoY, to N38.03 trillion in Q1’21 from N31.01 trillion in Q1’2020.
Further analysis showed that the increase in Broad Money supply (M2) was driven by 46 per cent YoY increase in Narrow Money supply (M1), which comprises Currency Outside Banks (COB) and Demand Deposits (Current Account deposits of bank customers).
According to the CBN, Narrow Money supply rose by N5.08 trillion to N16.17 trillion in Q1’21 from N11.12 trillion in Q1’2020.
Further analysis showed that the increase in Narrow Money supply (M1) is largely caused by 50 per cent (YoY) upsurge in Demand Deposits, which rose by N4.67 trillion to N13.87 trillion in Q1’21 from N9.22 trillion in Q1’ 2020.
Currency Outside Banks (COB) also grew by N430 billion or 23 per cent, YoY, to N2.33 trillion in Q1’21 from N1.89 trillion in Q1’2020. Also contributing to the increase in Broad Money supply (M2) is a 9.5 per cent, YoY, rise in Quasi Money, which comprises Savings deposits, Fixed Deposits and Foregn currency deposits of bank customers.
According to the CBN, Quasi money rose by N1.94 trillion to N21.84 billion in Q1’21 from N19.90 trillion in Q12020.