Sceptics raise eyebrows at April’s slow inflation rate

Consensus view of economists compiled by Bloomberg forecast was an inflation rate of 18.80 percent.

The variance between forecasts and the published data can be explained by inflation expectations and the possible underestimation of consumer resistance to price increases.

Most analyst expectations were anchored on the view that the major causes of inflation remain entrenched.

Surprisingly, Nigeria’s headline inflation for April fell slightly by 0.05 percent to 18.12 percent from 18.17 percent in March.

This is the first decline since August 2019 when the land borders were closed. The unexpected drop in the annual price level can be partly attributed to the decline in the food sub-index. Food inflation moderated to 22.72 percent from 22.95 percent in March.

It is worth mentioning that a decline in inflation does not necessarily imply that prices are falling.

It simply means that commodity prices are increasing albeit at a slower pace. Of all the inflation sub-indices, only core inflation increased.

All non-food items increased particularly healthcare (15.88%) and transport (14.87%). This suggests that inflation is yet to reach an inflection point. Hence, the decline in inflation is not likely to be sustained.

The slight drop in inflation came as a surprise to investors, analysts and consumers. This is because anecdotal evidence suggests the exact opposite.
Market proxies like the AFEX commodity index and retail prices in urban markets showed a spike in the general price level due to output shocks and supply chain disruptions emanating from heightened insecurity.

Some analysts have attributed the slowdown in inflation to base year effects. In Q2’20, inflation rose mildly due to the immediate impact of panic buying amid output shortages and supply chain disruptions.

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However, other analysts have raised eyebrows about Nigerian inflation falling at a time when global food prices are rising and US inflation climbed to an 11-year high of 4.2 percent.

The global food index rose by 1.7 percent to 120.9 points in April. The naira has also lost 13.35 percent in the last 12 months ago.

Notwithstanding, one month data is insufficient to form a trend. Hence, the conversation about inflation moderating when anecdotal evidence is moving in the opposite direction will be interrogated in weeks ahead.

A troubling trend however is that food inflation is falling at a time when global food prices are rising.

The global food price index increased for the 11th consecutive month to 120.9 points in April, 1.7 percent higher than March’s figure (118.8 points).

This was driven by an increase in the sugar, oil and meat price indices.

Over the years, food price movement has been a major driver of inflation in Nigeria.

The year-on-year food inflation dipped 0.23 percent to 22.72 percent in April from 22.95 percent in March.

On a monthly basis, it recorded a sharp decline of 0.91 percent to 0.99 percent. This could be as a result of base year effects and lagged impact of border reopening.
Food inflation increased steadily since the land borders were closed in August 2019 due to reduced supply.

This was compounded by currency pressures and heightened insecurity (output shocks and supply disruptions).

The borders were re-opened in December 2020 but food inflation continued to rise due to time lag effect.

Annual core inflation increased while month-on-month declined. On a yearly basis, the core sub-index increased by 0.07 percent to 12.74 percent.

Coincidentally, it fell by the same magnitude to 0.99 percent on a monthly basis. The increase in the annual index cut across all non-food items particularly for healthcare (15.88%) and transport (14.87%).

In the regional context, 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 recorded lower inflation rates, primarily as a result of a slowdown in the food sub-index.

In spite of the gradual economic recovery, these 5 SSA countries left their monetary policy rates unchanged.

This is to further monitor and assess the impact of the various fiscal stimuli. Nigeria is also likely to leave its monetary parameters unchanged and continue to assess the macroeconomic environment.

It is pertinent to note that apart from Angola and South Africa’s inflation rate, all other countries inflation rate dropped for the month of April 2021.

COUNTRY April inflation rate (%) Most Recent Policy Rate (%)
Nigeria 18.12 11.5
Angola 24.82 15.5
Kenya 5.76 7
South Africa 3.2 3.5
Ghana 8.5 14.5
Uganda 2.1 7
Zambia 22.7 8.5

In developing economies, it is usually advised that a country reconstitutes its inflation basket periodically (5-years interval).

This is to capture the changing consumption patterns of households. In Nigeria, the last time the basket constituents were revised was in 2009. This could lead to a significant bias in the measure of inflation and ultimately affect policy decision-making.

To eliminate this bias, it is important that the consumer price index (CPI) basket is revised to reflect current market and economic realities.

The current inflation rate is far above the natural rate of inflation. In the last decade, inflation in Nigeria averaged 11.2 percent, 6.92 percent lower than the current figure (18.12%).

Directionally, the drop in headline inflation could be cheery news to policy makers who had expected that increased fiscal stimulus and government interventions would spur output growth and taper inflation. However, nominally, inflation rate in Nigeria is still alarming.

The CBN also noted that inflation rate above 12 percent is growth retarding. The gross domestic product (GDP) numbers are scheduled for release on May 24 and will be a major consideration at the MPC meeting next week.

Notwithstanding, analysts expect the committee to carefully consider inflation expectations rather than historical trend in determining its policy stance.

Outlook
All eyes will now be on the Monetary Policy Committee (MPC) at their meeting next week to see their reaction to the unexpected drop in inflation.

The GDP numbers are scheduled for release on May 24. We are projecting a mild contraction of 0.5 percent. We also envisage that the committee would maintain its current stance and watch the indicators closely.

This is because inflation is likely to increase again in the month of May due to output shocks and supply chain disruptions as a result of heightening insecurity. This will be compounded by exchange rate pressures and higher logistics costs.