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Experts Differ On Nigeria’s Declining Inflation - NEW TELEGRAPH

JUNE 19, 2021

• Real rates of return improving, says Rewane

Financial pundits have expressed differing opinions over the slowing trend experienced in Nigeria’s Consumer Price Index (CPI) in the last two months. Some argued that it is difficult to explain a declining inflation when the naira is fast losing its value and food inflation rising, others are of the opinion a slower rise in food inflation could be responsible for the decline in the headline inflation. Meanwhile, FDC has said the declining inflation trend portends something good for investors. Bamidele Famoofo reports.

The Chief Executive Officer of Financial Derivatives Company, Mr. Bismarck Rewane, said his economic think-tank team had expected that headline inflation would climb to 18.2 percent in May contrary to 17.93 percent announced by the National Bureau of Statistics (NBS) this week. The argument of Rewane was premised on a data published by the Food and Agriculture Organisation (FAO) that global food prices are at a 10-year high of 4.8 percent. He said the declining inflationary trend in the last two months of April and May holds good promises for investors in the Nigerian financial markets as real rates of return is getting better as a result of Inflation interest rate differential reducing by 610bps in the last four months. Some Analysts have also expressed dismay about headline inflation falling when the naira is daily being weakened.

They had expected that a weakened naira will adversely affect the purchasing power of the people which will in turn take its toll on price of commodities. Managing Director, Investment- One Capital Management Limited, Ademola Aofolaju and Executive Director, Finance and Strategies at Guinness Plc, Stanley Njoroge, said it is not yet uhuru with inflation in Africa’s largest economy, noting that they see a continued rise in the months ahead.

The Bloomberg research team in their projection on inflation had also aligned with the position of FDC, noting that headline inflation in May will hit 18.2 percent from the 18.12 percent Meanwhile, financial experts at Cordros Capital Limited, in a report ahead of the release of the May inflation figure by the NBS, said it expected inflation to moderate. Cordros however estimated that inflation will be 18.01 percent contrary to 17.93 percent which it eventually printed.

In our April inflation report titled ‘A Transitory Moderation in Food Prices but Upside Risks Remain Elevated’ Cordros expressed that the year-on-year inflation rate will moderate given its expectation of a slower rise in food prices amidst a subdued growth in the core basket.

“True to our prognosis, the recently published data by the National Bureau of Statistics (NBS) showed that the headline inflation moderated for the second consecutive month to 17.93% y/y (April: 18.12% y/y). On a month-onmonth basis, the headline inflation increased by 4bps to 1.01% m/m – tracking below the 2021 average of 1.32%. The outturn is 8bps lower than Cordros’ estimate (18.01% y/y), with the deviation primarily seen from the core basket and 27bps lower than Bloomberg median consensus estimate (18.20% y/y).”

On the other hand, FDC argued that “based on our time series model and market survey, headline inflation is likely to increase to 18.2 percent in the month of May from 18.12 percent in April. The earlier news that headline inflation slipped marginally in April 2021 was received with a certain amount of skepticism by analysts. This was mainly due to the fact that anecdotal proxies seemed to be running contrary to the data.”

FDC further noted: “the question on the minds of most analysts is if this drop was a blip or a trend. What also raised eyebrows was the statement by the FAO that global food prices are at a 10-year high of 4.8%. Therefore, it becomes more difficult for analysts to comprehend how food inflation in Nigeria would be running in the opposite direction of the global food basket.” Rewane however noted that a decline in inflation does not necessarily imply that prices are falling, adding that it simply means that commodity prices are increasing albeit at a slower pace.

But in line with the FAO report on the rising global food price, Cordros acknowledged that after the positive surprise in April, food inflation resumed its uptrend in May in line with its expectation. They attributed the increase in food prices to the combined impact of resumption of food demand as the people depleted their Ramadan-induced food reserve, limited supply of food produce to the market given the ongoing planting season and pre-existing supply chain constraints. Also speaking about the causes of high inflation in the country compared to some other countries in Sub-Saharan Africa, FDC attributed a chunk of the blame to structural deficiencies, noting that it accounts for 42 percent of the challenge. It allotted 25 percent to monetary issues and transient, 30 percent.

Insecurity, forex restrictions, exchange rate pass through, seasonality, disruptions’ cost and higher energy cost among others are factors listed to be arousing high inflation in the country. Accordingly, the NBS reported that food inflation rose by 1.05 percent month on month in May compared to 0.99 percent recorded in April.

The breakdown provided by the NBS showed that price increases across Processed food (+12bps) and Imported food (+1bp) were enough to offset the decline in the prices of Farm produce (-13bps). Food inflation slowed down by 44bps to 22.28 percent year on year (y/y) in May 2021 compared to 22.72 percent in April. Notably, the highest price increases were recorded in Bread, Cereals, Milk, Cheese, Eggs, Fish, Soft drinks, Coffee, Tea and Cocoa, Fruits, Meat, Oils and fats and Vegetables. On a month-on-month basis, food inflation was higher at 1.05% in May (April: 0.99%). Contrary to the declines seen in the headline and food indices, core inflation rose by 41bps to 13.15 percent y/y.

Pressures were most significant in the prices of Pharmaceutical products, Garments, Shoes and other footwear, Hairdressing salons and personal grooming establishments, Furniture and furnishing, Carpet and other floor covering, Motor cars, Hospital services, Fuels and lubricants for personal transport equipment, Cleaning, repair and hire of clothing, Other services in respect of personal transport equipment, Gas, Household textile and Non durable household goods. Compared to the previous month, the core index increased by 25bps to 1.24 percent m/m in May.

State-by-State Analysis –Inflation highest in the North

In May, Delta had the lowest inflation rate (14.85%), followed by Imo (15.52%) and Katsina (15.69%). The states with the highest inflation rates are predominantly Northern states -Kogi (25.13%), Bauchi (23.02%) and Sokoto (20.11%). On month on month basis however, May 2021 all items inflation was highest in Kogi (2.22%), Ogun (2.17%) and Cross River (2.07%), while Ekiti (0.02%) recorded the slowest rise in headline month on month with River and Sokoto recording price deflation or negative inflation (general decrease in the general price level of food or a negative food inflation rate).

Food inflation on a year on year basis was highest in Kogi (32.82%), Kwara (26.02%) and Enugu (25.43%), while Akwa Ibom (20.06%), Bauchi (18.65%) and Abuja (16.91%) recorded the slowest rise in year on year inflation. On month on month basis however, May 2021 food inflation was highest in Kogi (3.11%), Ogun (2.89%) and Anambra (2.37%), while Edo, Sokoto and Ekiti recorded price deflation or negative inflation (general decrease in the general price level of food or a negative food inflation rate).

Inflation in other climes

Inflation trend in Sub-Saharan Africa has been largely driven by the food price trend and Nigeria is not an exception. Five of the SSA countries under the review of the FDC recorded lower inflation rates, primarily as a result of a slowdown in the food sub-index. In spite of the gradual economic recovery, all the SSA countries under our review left their monetary policy rates unchanged in April, the review period. This is to further monitor and assess the impact of the various fiscal stimuli. Nigeria is also left its monetary parameters unchanged in May to continue to assess the macroeconomic environment.


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