CBN warns of imminent inflation as businesses struggle with soaring input costs

The Central Bank of Nigeria (CBN) has raised fresh concerns about the possibility of a renewed inflationary surge, as businesses across key sectors grapple with rising input costs that are increasingly squeezing their profit margins.

The warning is contained in the apex bank’s June 2025 Purchasing Managers’ Index (PMI) Report, which provides a snapshot of economic activity and business sentiment across the country. The report paints a mixed picture—one of continued expansion in output, but also mounting cost pressures that could soon be transferred to consumers through higher prices.

According to the CBN, the input cost indices across the composite economy, as well as in the industry, services, and agriculture sectors, significantly outpaced their respective output price indices in June. This widening gap signals that companies are currently absorbing higher costs rather than passing them on—an approach the Bank warns may no longer be sustainable.

“The increase in the gap between higher input costs and output price tends to mount pressure on business profit margins. Cost absorption by firms is likely to be unsustainable in the long term and may foreshadow future consumer price inflation,” the CBN cautioned in its report.

This trend is particularly concerning against the backdrop of Nigeria’s persistent inflationary environment, which has been fuelled by currency depreciation, high transport and energy costs, and imported inflation due to global commodity shocks.

Among the three broad sectors surveyed—Industry, Services, and Agriculture—the agriculture sector emerged as the most impacted by the rising input-output cost disparity. It posted a cost absorption index of 9.8 points, the widest recorded in the survey. This implies that farmers and agribusinesses are under immense pressure, potentially setting the stage for future hikes in food prices, which already account for over 50% of Nigeria’s inflation basket.

By contrast, the services sector posted the lowest cost gap, at 4.4 points, suggesting a relatively more stable pricing structure. However, this still reflects pressure that, if unchecked, could spread more broadly through the economy.

Despite the cost pressures, the June PMI data show resilience across the economy, with all three major sectors reporting expansion in business activity. The composite PMI stood at 52.3 index points, indicating a broad-based expansion for the sixth consecutive month.

This reflects cautious optimism in business sentiment, driven by post-reform adjustments, seasonal growth in agriculture, and a gradual recovery in the industrial sector.

The Industry sector posted a PMI of 51.4, also marking its sixth month of consecutive growth. This was buoyed by increased production levels, with 9 out of 17 subsectors in the industrial category recording expansion.

The Services sector followed closely with a PMI of 51.3, as 11 of the 14 subsectors saw improved activity, likely driven by rising demand for logistics, hospitality, financial services, and digital platforms.

The Agriculture sector, however, was the standout performer, with a PMI of 55.2—the highest among all sectors and its eleventh consecutive month of growth. The sector’s expansion was supported by improved weather conditions, planting season dynamics, and targeted interventions aimed at boosting farming activities.

All five subsectors within the agriculture segment experienced growth, underscoring the sector’s centrality to Nigeria’s real economy.

While the ongoing expansion is welcome news for policymakers, the CBN’s warning about the unsustainability of cost absorption highlights a critical policy dilemma. If businesses begin to transfer these rising costs to consumers, headline inflation—already elevated—could rise even further, eroding consumer purchasing power and complicating monetary policy decisions.

The CBN, which has been tightening monetary policy in recent months to tame inflation and stabilise the naira, may now find itself in a delicate balancing act: continue raising rates to fight inflation or risk stifling the nascent economic momentum seen in the PMI data.

Analysts have suggested that input cost inflation is being driven by several underlying factors, including:

Continued depreciation of the naira, which raises import prices for machinery, fertiliser, raw materials, and fuel.

Energy price shocks following the removal of fuel subsidies and adjustment of electricity tariffs.

Persistent insecurity in agricultural zones, which has disrupted supply chains and raised logistics costs.

While the June PMI report shows positive momentum in output and business activity, it also rings alarm bells about the underlying cost pressures that could eventually unleash another inflationary wave. The CBN’s data suggest that the current strategy of absorbing costs without adjusting output prices may soon hit a breaking point.

As firms approach that inflection, a delayed pass-through of rising input costs to consumers may manifest in the months ahead. The central bank’s warning should therefore be seen not only as an economic advisory, but also as a call to action for fiscal and structural reforms to mitigate rising production costs and safeguard the fragile gains in economic recovery.