Headline inflation in May expected to hit 18.20%

Nigeria’s headline inflation for the month of May is expected to quicken as the National Bureau of Statistics readies to release the Consumer Price Index and Inflation report Tuesday.

Based on analysts’ time series model and market survey, headline inflation is likely to increase to 18.20 percent in the month of May from 18.12 percent in April.

Read Also: Sceptics raise eyebrows at April’s slow inflation rate

Nevertheless, the coronavirus vaccine has brought optimism, emboldened governments, strengthened businesses around the world and economies have reopened.

Top of the mind for monetary authorities is the need to keep monetary policy supportive of economic growth back to pre-pandemic levels of output are achieved.

While the Federal Open Market Committee classifies these factors as transitory, the committee has also recognised the speedy rate of economic growth (+6.4%YoY in Q1:2021), which it has described as “rapid progress towards the Committee’s goals”.

The earlier news that headline inflation slowed marginally in April 2021, was received with a certain amount of scepticism by analysts.

This was mainly because anecdotal proxies ran contrary to the data. The question on the minds of most analysts was whether the drop was a blip or a trend.

What also raised eyebrows was the statement by the Food and Agriculture Organisation of the United Nations (FAO), that global food prices are at a 10-year high of 4.8 percent.

It, therefore, becomes more difficult for analysts to comprehend how food inflation in Nigeria would be running in the opposite direction of the global food basket.

Food inflation is however projected to rise to 24.15 percent in May.

It is pertinent to note that farming activities were significantly affected in 2020 due to covid-19 movement restrictions during the planting season as well as abnormal rainfall patterns, which led to the flooding of farmlands.

This said it could be observed that the farmers/herder’s clashes and in recent times, banditry and kidnapping are a significant threat to agricultural productivity.

Banditry and kidnapping activities are at an alarming rate in Northwest Nigeria, which is the primary wheat cultivation region. Borno, Bauchi, Yobe, Kano, Jigawa, and Zamfara States are the major wheat producers and these states are currently undergoing military operations in the fight against terrorists and bandits.

These restrictions make it highly difficult for farmers to access their farms. These unfortunate events have led to a spike in food prices reflected in the food inflation rate of 22.70 percent in April according to the National Bureau of Statistics (NBS).

According to the United States Department for Agriculture (USDA), 2021 will be another year of low wheat production. FAS forecasts Nigeria’s wheat production in 2021/2022 to reach 55,000 metric tons (MT) compared with a consumption forecast of 4.9 million metric tons (MMT).

In September 2020, President Buhari called for a ban on dollars for food imports and added fertilizers to the restricted items list. Based on a USDA report, this action is forcing wheat and soybean importers to source dollars at higher rates through the parallel markets, consequently increasing the cost of flour and leading to rising prices of bread and other wheat flour-based products.

Nigeria remains a net importer of wheat, though there is a 5 percent tariff on wheat imports, plus an additional 15 percent levy for the national wheat development programme.

The Ministry of Agriculture has been making commitments to reduce wheat imports, but this does not appear feasible in the near term.

Besides, the current insecurity issues, the agriculture sector remains plagued with long-standing structural challenges, which if not ameliorated, would continue to result in low output/high price levels.

Apart from the anticipated rise in headline (y-o-y) inflation, analysts’ model also indicates a sharp increase in monthly inflation to 1.20 percent (15.34% annualized) from 0.97% (12.3% annualised) in April.

Core inflation (inflation fewer seasonalities) is also likely to creep up to 13.32 percent from 12.74 percent in April.

Global economists are struggling with differentiating between the features of the current inflation trend.

In Nigeria, a number of factors – some structural and some transient, drive current inflation. Some of these factors include money supply growth.

Theoretically, money supply growth is a fundamental driver of inflation, especially in the short run. However, in the long term, it unlocks unemployed resources.

The broad money supply jumped by 20.09 percent to N38.38 trillion in April 2021 from N31.96trn in April 2020 and is projected to increase towards N40trn in June.

Fiscal deficit: economists are of the opinion that an increase in fiscal deficit could fuel inflationary pressures. This is because increased government borrowing especially through ways and means advances would boost liquidity and exert inflationary pressures.

Exchange rate pass-through effect: Imported inflation has remained high due to currency pressures. In recent times, the blend between official and autonomous rate has improved to 20:80 from 10:90. This is expected to reduce the average blended rate to N450-460/1$ from N476/1$ in Jan’21, pointing to a possible reduction in import costs.

Insecurity: Insecurity has been a major disruptor to the commodities value chain. A recent market survey revealed that commodities with the highest price increases are grown in the North.

In the last 5 months, the price of beans increased by almost 50 percent, tomatoes jumped by 285 percent while pepper surged by 300 percent.

The Onion Producers and Marketers Association of Nigeria have threatened to stop the supply of onions to the South. This could push up the price of onions to over N40,000 per bag from its current price of N21,000.

Higher energy costs: State governors have agreed to full deregulation of the downstream sector, which points to a possible increase in the price of PMS to N385/$ in the near term.

Average petrol price increased to N165/litre in 2021 from N145/litre in 2020. Transport and logistics account for 6.51 percent of the inflation basket. In addition, there is likely going to be another electricity tariff hike in July.

Although analysts’ prognosis indicate that risk to consumer prices remain tilted to the upside, on a year-on-year basis, we expect a moderation in headline inflation due to the relatively high consumer price index (CPI) reading in May 2020.

Nonetheless, the persisting insecurity plaguing the Nation’s food belt and the extant challenges associated with sourcing foreign exchange supports our notion of a month-on-month increase.

Based on our perception of market prices, we expect food items like vegetables, fruits, yam, fish and beverages to remain the key drivers of food inflation.

Additionally, we fully expect festivity driven demand during the Ramadan celebrations to add another layer of pressure to prices. Overall, we expect headline inflation to stand at 18.20 percent YoY in May 2021.