Inflation’s steady march lower continued in August 2024, with the Bureau of Labor Statistics reporting a year-over-year increase of 2.5%. This is the lowest reading of inflation since 2021. The rate of inflation for August 2024 fell slightly below the 2.6% rate widely expected by economists; it is significant slowdown from the 2.9% rate of inflation in July 2024. This means that inflation in America is edging downwards towards the 2% rate that is the target of the Federal Reserves, the central bank of the United States of America.
Prices in America and major western economies rose to historic heights from 2021, rising to 8.6%, the highest rate of inflation since 1981, a highly inflationary period. The rise in inflation was widely understood to have been a result of supply shocks or disruptions in the supply chain caused by the coronavirus pandemic. Monetary authorities have been blamed for misunderstanding the rise in inflation as a temporary glitch and thus delaying interest rate hikes to cool the economy. Fiscal authorities (governments), especially the Biden administration have equally been blamed for over stimulating demand with unduly large spending programmes or fiscal stimulus to jump start the post-covid economy. The result has been a steep rise in the price level and the “cost of living” crisis.
While inflation is trending downwards, prices remain high for consumers and voters, making the Democratic Party vulnerable to attacks by Republicans for driving prices up with “socialist” spending programmes. This dynamic was a significant factor in Tuesday September 10 Presidential debate. Republican nominee Donald Trump criticized the Biden administration, particularly Vice President Kamala Harris, for overseeing a period of significant price growth, although his assertion that it was the worst in U.S. history was factually inaccurate.
Harris, in response, focused on legislative measures such as the Inflation Reduction Act, rather than addressing inflation directly. Harris argued that many economists believe Trump’s tariff-heavy economic policies could lead to a resurgence in inflation.
Post Covid Inflation: Consumers Still Hurting from the elevated price level
Since the onset of the COVID-19 pandemic, the cost of essential goods in the U.S. has surged, with items like milk and eggs seeing significant price hikes. Overall, the consumer price index has risen by 21%, placing a heavy burden on household budgets, particularly for low-income families. While food prices have increased, the sharp rise in housing costs has been even more pronounced, with rent jumping 25% nationwide, causing severe affordability challenges, especially in cities like New York and Los Angeles.
In tandem with rising rents, eviction rates have soared in several U.S. cities, outpacing pre-pandemic levels. At the same time, a slowing job market has led to an uptick in mortgage delinquencies, adding to financial insecurity for many Americans. These developments highlight the persistent economic pressures on households, even as inflation moderates, raising concerns about the U.S. economy’s stability moving forward.
The Federal Reserve’s Challenge: Is the American Economy Slowing Too Fast, Or Will Bigger or Faster Rate Cuts Over Stimulate the Economy and Stoke Inflation Again?
The Federal Reserve is expected to cut interest rates by 0.25% this month, lowering its key rate from 5.3%. However, experts warn that this modest reduction may not significantly lower borrowing costs or stimulate economic growth in the short term. Uncertainty remains about whether this rate cut will be enough to prevent a deeper economic downturn, with some economists optimistic about a “soft landing” for the U.S. economy, while others highlight risks of a “hard landing” due to weak job data. Investors are closely watching Fed Chair Jerome Powell’s upcoming remarks for signs of further rate cuts and their impact on the economic outlook.
Implications for the Nigerian Economy and Emerging Markets
The trajectory of inflation in the U.S. and the Federal Reserve’s monetary policy decisions have far-reaching consequences, not just for the U.S. economy but also for emerging markets and frontier markets like Nigeria. As the U.S. potentially enters a period of lower inflation and a softer monetary policy, there could be a ripple effect on global markets, including African economies.
For Nigeria, the Fed’s actions could impact currency stability and capital flows. Lower U.S. interest rates tend to weaken the dollar, which could provide some relief to Nigeria’s foreign exchange reserves and reduce pressure on the naira, Nigeria’s embattled currency. A weaker dollar might also spur investment in commodities like oil, a crucial export for Nigeria, driving up global oil prices and boosting Nigeria’s revenues. Conversely, a slowing American economy may fuel negative sentiment about growth prospects that could cool demand and the price of oil.
However, Nigeria’s domestic challenges, such as high inflation, a struggling energy sector, and rising debt, mean that the potential benefits of a softer U.S. monetary policy may be limited. The Nigerian economy is grappling with its own inflationary pressures, driven by fuel subsidy removals, naira devaluation, weak forex inflows and supply chain disruptions. These domestic issues may counterbalance any positive impact from global economic trends, leaving Nigerian policymakers with a complex set of challenges to address.
Emerging markets across the globe, including Nigeria, are highly sensitive to U.S. interest rate movements. Should the Federal Reserve adopt a more aggressive rate-cutting stance in the future, capital flows could shift back toward riskier assets, including African economies. For Nigeria, this could mean a resurgence in foreign investment and increased access to international capital markets—critical for funding infrastructure projects and stimulating economic growth. But these positive prospects depend more on Nigerian authorities’ willingness and political skills in removing age long structural barriers to growth, especially the vexatious fuel subsidy.
While the U.S. inflation report offers some hope for relief from rising prices, the global economic outlook remains uncertain. For emerging markets like Nigeria, the key question will be how well they can navigate the dual challenges of domestic inflation and the shifting landscape of global monetary policy.
