Inflation falls to 11.61% in May on base effects, stable FX

The rate at which the prices of goods and services increased in Nigeria moderated to 11.61 percent in May 2018, amid base effect, declining petrol prices and stable exchange rate, the lowest inflation rate in more than two years since March 2016.
This was 0.87 percent points less than 12.48 percent reported in April 2018. The Consumer Price Index (CPI) which measures inflation eased for the sixteenth consecutive months since January 2017, as gathered from the National Bureau of Statistics (NBS) figures.
“Declining fuel prices coupled with stable exchange rate backdrop are the support of the disinflationary story that we are seeing,” said Wale Okunriboye, Head, Investment Research at Sigma Pensions.
“There was negative rate of return but that has now been reduced to zero. Which means that the incentive to save has increased for Nigerians,” Bismark Rewane, MD of Financial Derivatives said in phone response.

Moderating inflation rate for companies, means that their cost of operations which has been rising at a very rapid rate due to the galloping inflation in 2016 and 2017 will see the growth in expenses rise at a slower pace than it did in the last two years.
While for an average Nigerian, the disinflation means that his purchasing power will now depreciate at a slower pace than it did in the last 2 years.
With wages effectively stagnated in Nigeria, households have struggled to maintain their standard of living with the high inflation rate. The slower pace of growth in general prices means that at least they should be able to maintain their current standard of living for the foreseeable future while they await the expected increase in minimum wage by the Federal Government.
For equity investors, a lower rate of inflation means that companies may post higher profits than they did in the past year as they can now have lower costs.
Also, if the Central Bank reduce interest rate in response to the drop in inflation, the lower discount factor will mean that the intrinsic value of companies in their portfolio will be a lot higher.
For fixed income investors, they will cheer the current disinflationary pressure in the economy as lower rates of inflation push bond prices higher. Although the reinvesting rate of return will be lower considering yields will drop as bond prices rise. Government will also be able to raise fresh funds in the money market at lower interest rate. This won’t exactly be a good thing for banks and other financial institutions who have been making easy money in the past year with the double digit treasury yields.
Although, on a month-on-month basis, the Headline index increased by 1.09 percent in May 2018, up by 0.26 percent points from the rate recorded in April 2018.

Meanwhile, the monetary policy committee is scheduled to hold its next meeting on
23rd – 24th July, 2018, as compiled from the CBN website.