As the dollar rate falls, why do prices of goods still rise?

The fluctuating exchange rate and rising prices are causing major economic concerns.

Increase in rate = Increase in Price

Decrease in rate ≠ Decrease in Price

While a lower dollar rate should theoretically reduce import costs and product prices, the reality is more complicated due to market behavior.

Businesses tend to quickly raise prices when costs increase, claiming reasons like old stock levels. However, they are very slow to lower prices when costs decrease until absolutely forced to by competitive pressures over an extended period.

“If you anticipate profit, you claim it quickly.

If you anticipate loss, you delay it until when necessary”

The rationale is that businesses want to avoid potential losses if exchange rates suddenly spike back up after they’ve cut prices based on a temporary dollar dip.

At what point then does it become necessary for a businessman to reduce price?

Truth is they need certainty that a lower rate will be sustained for months before adjusting prices downward.

For example, if a $20million import costs N36 billion at N1,800 per dollar, and the rate falls to N1,400, the same import would cost only N28 billion — an N8 billion savings. In theory, this should lead to reduction in prices.

Gentle reminder, this is Nigeria. Read on

Business owners now worry that if they cut prices and rates then increase, they can’t afford to restock inventory.

So there’s a wait-and-see mentality, with prices rising readily but falling slowly and reluctantly.

Even when forex costs drop, some businesses exploit the situation to raise prices unnecessarily, capitalizing on consumer confusion, because really… they’re not in business to count bridges.

I’m not making an excuse for business owners, but my bias is tilted towards them rather than the customer, enough about me, let’s continue

The only forcing function may be if exchange rates remain stable at lower levels for say 4–5 months or more. “Sustained forex rates around N900-N1100 for the rest of 2024 could gradually lead business owners to reasonable price reduction”…and still be profitable.

Then we have businesses that are not directly affected by exchange rate however increase their prices because “dollar don cost”

A prime example is a carpenter raising the fees for their services.

A carpenter does not import their skilled labor, so their prices are not directly impacted by exchange rates. However, they still face upward pricing pressures from generalized inflation.

As the costs of many consumer goods and inputs rise due to inflation, it has a ripple effect across the entire economy, even for purely domestic services and locally-sourced products like Titus. For the carpenter, items like: Rent for their workshop space, Utilities to power tools, Raw wood and hardware materials, Transportation costs, Daily living expenses.

All of these inputs to operate their carpentry business increase in price when overall inflation is high. To maintain the same profit margins and cost recovery, the carpenter is compelled to raise their service fees correspondingly.

While their core skills are not imported, the carpenter still gets caught in the inflationary cycle impacting all the raw goods and services required to run their business. Raising prices becomes a defensive move to preserve earnings power. Afterall “carpenter no go chop”?

On the other hand, some businesses display unethical greed, distrust of markets, and fear of losses that prevent any price reductions regardless of input cost dynamics. Overall inflation also enables many services to increase pricing when their costs didn’t truly rise.

In simple terms, prices in Nigeria go up very easily but rarely come back down, even when the exchange rate improves. Businesses are extremely reluctant to reduce prices once they’ve been raised. Consumers end up paying more while companies focus on maximizing their profits rather than passing along any cost savings.

There is a lack of true competition, no effective regulations to protect consumers, and not enough transparency into the real costs businesses face. Companies take advantage of this situation.

They quickly raise prices at any excuse, like changes in the exchange rate. But then they don’t lower prices again even when the exchange rate falls and their costs should be coming down. Businesses will claim all sorts of reasons to delay or avoid those price cuts.

They want to hold onto the extra profits from the higher prices as long as possible. And they are extremely cautious, worried that if they do cut prices based on a temporary improvement in costs, they could lose out if things reverse again soon after.

While theoretically, a lower dollar rate should alleviate import costs and eventually lead to lower product prices, the reality is far from straightforward.

No matter how much you try to apply textbook theories, Nigeria just keeps defying the rules. It’s a comedy of errors, a circus of economic absurdities where the only certainty is uncertainty. So buckle up, because in Nigeria, even economics needs a sense of humor.

Stay happy and stay hydrated✌️