Inflation forecast at 14.7% may throw investors returns into negative territory

Ahead of the release of May inflation figures next week by the National Bureau of Statistics (NBS), analysts have predicted headline inflation to increase to 14.7 percent from the level of 13.7 percent in April 2016, which may throw the returns of investors into negative territory.

The expected upward momentum in headline inflation in May reflects increases in both food and core components of inflation.

With a 51.8 percent weighting in the inflation basket, the food component has been responsible for a sizeable amount of overall price pressure.

Specifically, increases in the prices of cereals, fruit, meat, fish, dairy, tubers, tomatoes, and vegetables are the main culprits behind the acceleration.

According to The Economic Intelligence Group, Access Bank Plc, the rising inflation will throw real returns for investors further into negative territory, while the Bond yields will likely nudge higher as investors will want to be compensated for rising prices and inflation. 

The review of petrol pump price is likely to have mounted further pressure on May inflation numbers, driven by the transport component and the electricity, gas and other fuels components, which together contribute 23.2 percent to the CPI weighting.

“The CBN is caught between the proverbial rock and hard place as it contemplates further monetary policy tightening to limit the pass-through to inflation but risks stifling demand-led growth. Our expectation is for interest rates to gradually increase over the rest of this year in a bid to rein in inflation expectations,” analysts at Access Bank said.

Continued weakness in the naira, following the announcement of the deregulation of the downstream petroleum sector has also placed significant pressure on the inflation rate.

This will have filtered into consumer prices as some firms may have sourced scarce foreign exchange (FX) from the parallel (black) market to import intermediate goods to maintain operations.

“Although, Nigeria’s economy contracted in Q1-2016, inflation is likely to remain pressured,” Razia Khan, Chief Economist, Africa, Standard Chartered Bank, said in a report made available to BusinessDay.

The Standard Chartered-Premise Consumer Price Tracker (SC-PCPT) for Nigeria surged 2.75 percent m/m in May, following strong monthly gains of 1.07 percent in April and 1.20 percent in March.

Prices, as measured by the SC-PCPT have now risen in every month since December 2015.

Each of the 12 food sub-categories surveyed experienced m/m inflation in May, with 10 out of the 12 categories showing y/y inflation.

The strongest price gains were observed in the sugar (up 20.36% y/y), vegetables (19.2% y/y) and oils and fats (16.5% y/y) sub-categories.

23 out of the 25 surveyed products that are subject to Nigerian FX controls also saw m/m inflation – with earlier restrictions evidently still helping to drive price gains, especially for imported rice and tomato paste.

Faster inflation amid worsening economic weakness may have prompted a policy rethink, according to Khan.

Real GDP fell 0.36 percent y/y in Q1-2016, even as official headline inflation accelerated to 13.7 percent y/y in April.

HOPE MOSES-ASHIKE