Due to an economic phenomenon called imported inflation, the cost of used vehicles commonly known as “Tokunbo” cars could rise in the next few months.
Imported inflation refers to an increase in the price of finished goods or raw materials imported from a country experiencing high inflation.
Rising inflation in America on consumer goods is about to trigger a tsunami of import inflation into Nigeria. The focus will be on used cars, which are a major imported item from Africa’s largest economy.
What it means for Nigeria
More than 20% of Nigeria’s imported vehicles from the USA are used cars. Nigeria is a major market for used vehicles, which are imported from America, Europe and other countries. However, the United States of America remains the largest country of import for Nigeria.
According to the National Bureau of Statistics data, Nigeria imported approximately N140 billion worth of used vehicles during the first quarter of 2021 and N150billion in the fourth quarter of 2020.
Nigeria imports approximately N600 billion, or $1.2 billion annually, from the US, which is 90% of its total used car imports.
This Nairametrics estimate that rising inflation in the United States will have an impact on countries that depend on its finished goods.
U.S. Inflation is rising
Unexpectedly, the pace of inflation in the U.S. consumer price indexes accelerated in June. This cast doubt on the Federal Reserve’s (their CBN’s) belief that rising inflation in the country’s recovery period will be temporary. The Bureau of Labour Statistics reported that the monthly price rise was 0.9%. This is the largest increase in one-month since June 2008.
The most drastic price increases have been seen in the sectors directly affected by coronavirus pandemic. While travel-related costs like airfares have increased, a shortage of semiconductors has led to an increase in used cars prices.
The US Bureau of Labour Statistics reports that a record-breaking increase in the cost of previously owned vehicles was responsible for one third of the CPI rise last month. They rose by 10.5% in June compared to the previous month.
According to the US Federal Reserve, this year’s high levels of inflation are “transitory”, meaning that they will decrease when Covid-19 lockdowns ease and supply meets demand.
In June, US policymakers predicted that core inflation would rise by 3% this summer before dropping to 2.1% in 2022. In light of Tuesday’s unexpectedly high inflation, the central bank might be forced to reduce monetary support and decrease asset purchases faster than initially anticipated.
Economists predict this will impact nations that depend on US products as they will need to pay more for goods sourced from the US.
This is why it matters
Nigerians are known for their strong desire to buy imported cars and other consumer goods from the United States. This is expected to have a negative impact on the country’s economy as it will likely increase local inflation and create economic hardship.
The spiralling dollar value against the naira could make it more difficult for middle-class Nigerians to afford their basic needs.
Additional charges such as clearing cost are also associated with importation.
Importers could see an increase in the cost of used cars, which could lead to higher transportation and logistics costs. This could create a storm that will support higher inflation.
Beat the wrap
Nigerians who want to buy imported Tokunbo cars might have to pay upfront if they wish to avoid paying more for imported vehicles due to inflation.
This could mean that you should secure your foreign currency as soon as possible, and pay for the used cars instead of waiting until the prices rise.
Another option is to wait until the U.S. inflation drops as some economists predict. But, it is not certain that this will happen.