Experts project slow growth, high food prices despite inflatio


…say CBN may relax interest rates 

Recently, the National Bureau of Statistics (NBS) released the inflation figure for the month of May 2018 which dropped to 11.66 per cent, about 0.82 per cent decline from the 12.48 per cent recorded in April.

Daily Trust in this analysis sought experts’ views on what this drop, which is at the lowest level in over two years, would translate into in terms of consumer goods, foodstuff prices, and interest rates for manufacturers.  

On economic issues, the 14th of every month has become significant for keen economic watchers in Nigeria, who look forward to the inflation figures as released by the NBS.

Consistent with analysts forecast for a continued decline, the latest inflation figures came in at 11.66 per cent in May, albeit lower than April inflation of 12.48 per cent.

 The decline in inflation was primarily driven by a high May 2017 base (m/m inflation: 1.9%) as m/m inflation in May 2018 actually rose to 1.1% from 0.8% in April – the highest m/m inflation since July 2017.

 Across sub-indices, Core inflation declined slightly on yearly basis- from 10.9% to 10.7%, but rose on monthly basis – from 0.9% to 1.0%. Food Inflation also declined y/y – from 14.8% to 13.4%, – but jumped m/m from 0.9% to 1.3%. Given the rise in m/m inflation, the moderation in annual core and food inflation was as a result of aforementioned base effects.  

Drop in inflation rates and consumers

Our reporter has gathered over time that all of the indices mentioned above do not matter so much to household, if the decline is not reflected in a drop in the prices of garri, rice and other staple foods.

 This singular expectation stems from the simple understanding that inflation means high prices for goods and services and therefore a reduction in inflation (dis-inflation) should also result in fall in prices, especially of foodstuffs.

 There is a misunderstanding of the fact that inflation rise or drop is not a function of food prices alone; it is an average aggregate price of a basket of things. So while the prices of other items in the basket may have been coming down, it appears food prices are not crashing.

 In the latest figures, although food inflation was down significantly y/y, it was much higher m/m, with additional pressure primarily coming from domestic food prices. Despite the sharp uptick in m/m food inflation, imported food inflation was little changed at 1.2% m/m. 

 Impact of food prices on inflation

Analysts at Vetiva Research said: “In terms of food prices, we point to the ongoing violence in the middle belt and the reported disruption of farming activities as a likely driver. We are concerned that the uptick in food price pressure is here to stay and revise our inflation expectations in line with this view.”

 Anthony Monye-Emina, a professor of economics, in an exclusive chat corroborated Vetiva’s position saying, “The production of food crops is not going smoothly in some of the farming communities because of the displacement of farmers not just peculiar to the North-east. So the shortage of supply of food foodstuffs is the primary reason.”

 A further analysis of the inflation trend in the country suggests that for the past three years, May has been a particularly bad month for Nigerian inflation. “May had the highest m/m inflation in 2016 and 2017, and we have now observed a material uptick in m/m inflation in May 2018,” they stated. 

Analysts noted that the trend did not extend before 2016 and highlighted one-off events as likely drivers of the phenomenon. In May 2016, Nigeria absorbed a sizable hike in petrol prices (from ₦86.50 per litre to ₦145.00 per litre) on top of an initial electricity tariff hike in February 2016.

 The current drop in the inflation figures signals different hinges to different people. Lukman Otunuga, Research Analyst at FXTM, noted that the drop is an encouraging development, “Nigeria’s inflation has eased to 11.6% in May, the lowest level seen in more than two years. With consumer prices slowly edging closer to the Central Bank of Nigeria (CBN) target of 6%-9%, an interest rate cut seems likely before year-end.

“The combination of easing inflationary pressures, improving economic fundamentals and ongoing foreign exchange stability could encourage the CBN to cut interest rates in the second half of 2018,” he added.

 Mr Taslim Shitta-Bey, a financial analyst, described Nigeria’s condition as “stagflation” (inflation and slow growth). “To solve one, you must make one worst. Tightening the belt worsens unemployment.”

 Vetiva noted that it has reversed its inflation outlook on the back of higher insecurity and government spending. “We remain concerned about food prices given the security situation in the middle belt. In addition, we are cautious on demand-pull inflation given likely fiscal injections in H2,” it added. 

It pointed at delayed budget passage (and subsequent frontloaded capital disbursement) and pre-election spending as primary drivers of the expansionary fiscal policy outlook in H2 (second half) of 2018 and foresees this and food price pressure becoming more influential.

“Based on our view that m/m inflation would be higher in the second half of the year, we raise our June and average inflation forecasts to 11.1% y/y and 12.0% y/y respectively (previous: 10.5% and 11.6%),” Vetiva projects.

 Professor Monye-Emina is, however of the opinion that inflation is not exactly a bad thing. “We need some level of inflation to stimulate economic activities,” he stated. 

He noted that interest rate should not be a major source of concern of producers for now. The major concern should be on other inputs in the production process, he said, adding that, “One major area where manufacturers are spending a lot of resources is power. If you address this problem, interest rate will be of little or no consequence given the potentials of our market and economy.” 

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