Headline inflation for June will likely creep back up to 18.10 percent, a level last seen in March 2021.
This could represent a point of inflection on the trend line of declining inflation which started in April 2021.
Some sceptical analysts had questioned the basis for a decline in the rate of inflation at a time when global food prices and other causative factors of inflation were moving in the opposite direction. One of the key catalysts of price inflation in Nigeria has been the pass-through effect of exchange rate adjustments on domestic prices.
One reason why there has been a delayed impact of the recent depreciation of the naira on the domestic price level is the outside lag effect. It was only on May 24, 2021, that the Central Bank of Nigeria (CBN) moved the exchange rate.
Therefore, the impact will only be felt in June and July. Other causative factors include higher logistics costs, insecurity, and planting season effect.
Recall that Nigeria’s inflation rate slowed further for the second consecutive month to stand at 17.93 percent in May 2021 from 18.12 percent recorded in April 2021.
Historically, a key driver of inflation has always been associated with changes in the composite food index or changes in food prices, and indeed, the National Bureau of Statistics Consumer Price Index (CPI) Report confirms that Nigeria’s inflation had been on an upward trajectory for 20 consecutive months from August 2019 until the downward inflationary trend began in April 2021.
Read also: International food prices drop first time in 12 months
The upward trend in inflation during the 20 consecutive months from August 2019 was largely due to food inflation exacerbated by the temporary closure of the Nigerian borders in August 2019.
With the year-on-year composite food index reducing to 22.28 percent in May 2021 (a critical segment in the basket of consumer goods and services purchased by households) compared to 22.72 percent in April 2021, the composite consumer price was bound to reduce in tandem.
Several sources appear to provide data and reports that are at variance with the CPI reports released in the last few months.
Specifically, the CBN’s communique issued after Monetary Policy Committee meetings have repeatedly identified persistent insecurity across the country, protracted structural deficiencies impacting the logistics of moving food items to urban areas such as poor road networks, unstable power supply and a host of other infrastructural deficiencies, persisting impact of coronavirus-induced supply disruptions, hikes in the electricity tariffs, and exposure to international petrol prices et cetera as the root causes of the continued rise in inflation as well as persistent exchange rate pressures, dwindling capital flows, weak growth of the foreign reserves, and other structural issues. Most of these structural issues still exist yet, inflation appears to be declining.
In addition, the World Bank in its Nigeria Development Update published in June 2021 reported that rising Nigerian inflation rates were exacerbating impoverishment and depressing the economy; “driven by a steep increase in food prices” with the situation worsened by poor weather, insecurity and conflict, and pandemic-related issues that affect food production and access to markets.
The same World Bank update also pointed out that “prices are increasing rapidly, severely impacting Nigerian households. As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60% of the total increase in inflation. Rising prices have pushed an estimated 7 million Nigerians below the poverty line in 2020 alone.”
The consensus amongst economists also, is that cost of basic food items are directly correlated with the level of agricultural activities.
With the intractable Boko Haram insurgency in the Northeast, the persistent farmer-herder communal clashes largely in the Middle Belt (the food basket of the country), persistent kidnap of farmers and traders across the country, poor road network and epileptic power supply; all of which contribute to constricting food production, distribution, and storage, it is not clear how NBS CPI data represents that food inflation is improving year on year.
Commodity price movement in Lagos
The Financial Derivatives Company (FDC) survey is Lagos-specific and much narrower sample size than the NBS nationwide survey. Statistically, a narrow sample size may not be reflective of the entire market.
However, since Lagos is believed to contribute about 40 percent of Nigeria’s GDP and transactions, the weight of Lagos in a national survey cannot be underestimated.
This is validated by Lagos ranking of 18 out of 36 states of the federation in May, making it to be the median. Kogi State and Bauchi state had the highest rate of inflation in May. That being the case, there is a high probability that the outcome of a Lagos survey is more likely to influence the national empirical findings.
Based on recent market survey, commodities prices have remained stubbornly high. The average price of food commodities jumped by 93 percent from Jun ’20 – Jun ’21 while it increased by an average of 28 percent from Jun ’19 to Jun ’20.
The impact of seasonality and rising global commodity prices on food Inflation
Food inflation is projected to rise to 23.4 percent in June after falling for two consecutive months.
Rising commodity prices are being amplified by the impact of seasonality and rising global commodity prices. The impact of delayed rainfalls and seasonality also came to play as we saw food prices surged in June. Seasonality could have been responsible for a spike in the prices of some agricultural commodities such as tomatoes, pepper, onions, etc. The relative price inelasticity of these commodities (no close substitute) has made the demand remain unchanged.
When imported commodity prices rise and become unaffordable the switch in demand of local substitutes lead to higher prices (cross elasticity of demand). Imported commodities increase as the global food index climbed to a record high of 124.6 points in June.
Higher logistics costs and exchange rate pressures to keep core inflation elevated
The question on the lips of analysts is likely to be “Why this reversal of the trend? Whilst some analysts expressed scepticism as to the sustainability of the trend, our understanding of the change in direction is because the base year effects of 2020 have since waned and that a new impetus of price momentum is at play again.
For example, it was only on May 24th that the CBN moved on the exchange rate adjustment from N379/$to N411/$ at the IE window.
In the parallel market, the Naira fell by 3.9 percent to N505/$ because there was not a corresponding increase in forex supply to the market. The impact of the currency pass-through to domestic prices only began in June and July.
In addition, the price of diesel, the principal fuel for logistics and distribution spiked 23.95 percent to N295 per litre. These factors were mainly responsible for pushing both food and other prices against the expected direction.
Month-on-month to increase despite weak consumer demand
Despite the weak aggregate demand, month-on-month inflation is estimated to increase at a faster pace to 1.36 percent (17.61% annualized) in June from 1.01 percent (12.82% annualised) in May. This is because manufacturers continue to pass on the increase in production costs to consumers.
Investor and market reaction
If the NBS announces an increase in inflation, investors and the market would not be surprised and will take it in stride. This is because the markets were just as surprised as analysts when inflation supposedly moderated.
The stock market which technically has an inverse relationship with interest rates has already lost 2.04 percent since June. This is because investors have already priced in an increase in the general level of interest rates. The real estate market where vacancy factors are on the increase is not any different.
Sub-Saharan Africa
It appears that the inflation trend in Sub-Saharan Africa is moving in the same direction as the global trend. Of the peer countries under consideration, only Ghana recorded lower inflation.
Higher energy costs especially oil ($76.4pb) and base year effects are the major factors responsible for driving this rise in inflation across the SSA region. Monetary policy responses have varied across Africa.
Ghana and Uganda reduced their benchmark interest rate at their last meeting to support economic recovery while Angola increased its policy rate by 4.5 percent to curb inflationary pressures. Other countries maintained the status quo.
Inflation outlook and anticipated policy impact
The Monetary Policy Committee is scheduled to meet on July 26/27 to decide the monetary policy stance.
A one-month increase in the inflation rate is unlikely to force the hand of committee’s meeting in 2 weeks to make any change. They are more likely to adopt a wait-and-see approach this time around.
