Why Nigeria’s 5th successive inflation slowdown has no gain for consumers, investors

It may be difficult for many Nigerians to relate to the fact that the rate at which the price of goods and services increase in the country slowed for the fifth consecutive month to August 2021.

The headline inflation number released by the National Bureau of Statistics (NBS) shows that inflation for August 2021 slowed to 17.01 percent year-on-year from 17.38 percent.

While the falling inflation rate in August was linked by Ayo Ebo, Senior Economist/Head, Research & Strategy, Greenwich Merchant Bank, to the high base effect, the sharp increase in food prices in August 2021, the headline index on a month-on-month basis increased by 1.02 percent in August 2021, 0.09 percent rate higher than the rate recorded in July 2021 (0.93) percent.

This means that it is unlikely that the cost of living in Africa’s most populous nation reduced in August as the base effect and the month-on-month inflation figures mirror the reality of many Nigerians in the review period.
Some of the factors attributed to the month-on-month rise in the inflation rate were the naira depreciation by 2.3 percent month on month at the parallel market from N515/$ at the end of July 2021 to N527/$ at the end of August.

“Higher energy prices (average diesel price per litre rose by 1.4 percent month-on-month to N245.20/ litre in August from N250.80/litre in July 2021,” Ebo said.

A higher cost of doing business due to infrastructure bottlenecks and a faster increase in imported food inflation were some of the other reasons.

A breakdown of the components of inflation showed that the food sub-index, which accounts for approximately 50.7 percent of the inflation basket, rose by 20.3 percent year-on-year in August from 21.03 percent year-on-year in July.

Food inflation rose 1.1 percent month-on-month while imported food inflation was up by 1.4 percent largely due to weak currency.

Read also: CBN holds interest rate for 6th straight time as inflation concerns weigh

On the other hand, the core inflation which measures changes in the price of goods and services excluding food items that are usually volatile moderated to 13.4 percen year-on-year in August after the slow monthly rise of 0.06 percent between June and July 2021.

The slowdown in the inflation rate in August 2021, however, does not provide much relief to fixed income investors reeling from a negative real return.

With Nigeria’s 17.01 percent inflation rate in August, the lowest in seven months, the real return on the Federal Government less risky short-term Treasury Bills (T-Bills) depreciated further when compared with 2020, when the inflation rate stood at 12.26 percent.

While average inflation-adjusted returns on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively in 2020, the real return on the bills so far in 2021 has not been close enough to match the performance of last year.

The real return on T-Bills investment is still in the double negative figures. Factoring the 17.01 percent inflation rate in August against the interest rate reported in the last T-Bills auction result showed that the shorter 91-day and 182-day bills gave investors a real return of -14.51 percent and -13.52 percent, respectively.

The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -9.817 percent in August.
“The real return is still clearly negative because inflation is rising faster. If inflation was still at, say, the 11 percent that reported before the border closure, then we would have been fine,” Yinka Ademuwagun, investment management analyst at ValuAlliance Asset Mg, said.

After hitting a four-year low of near-zero percent last year, yields on the Federal Government risk-free treasury bills climbed to more than 17 months-high in September 2021 but was not enough to give the investor a positive real return.

While investors bid at a rate as high as 5.25 percent for the 91-day bill, 6.7 percent and 10 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria (CBN) settled at 2.5 percent, 3.5 percent and 7.2 percent, respectively.

The stop rates for the 91-day bill have remained flat for most of this year but the yield on the 182-day bill declined for the first time this year to 3.4 percent from 3.5 percent in the previous auction, as compiled from the auction result for the paper issued in the week of September 15 2021.

The 364-day bill increased by 100 basis points compared to the 8 percent reported in the previous auction.

The interest rate on the 364-day bill remained flat in the reviewed period to 7.2 percent after it increased for the first time in 16weeks.

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