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Inflation rate: Odds favour upward movement in Q3

By on June 23, 2014

Expectedly, the latest inflation rate, put at 8 per cent as against 7.9 per cent in April, has continued to elicit excitement in the camp of the handlers of the nation’s economy although emergent economic scenarios have underscored the need for Nigerians to brace up for higher inflation rate in the months ahead, reports Festus Akanbi

Despite the marginal increase in the Consumer Price Index (CPI), which measures inflation, from 7.9 per cent in April to 8.0 per cent in May, the thinking within the corridor of power is that there is no cause for alarm, given the fact that the inflation figure is still within the 6-9 per cent band of the Central Bank of Nigeria for 2014.
Economy watchers noted that since a decline of the headline index in January, prices have continued to trend upwards, albeit at a slow pace increasing by 0.1 percentage points (year-on-year) each month between February and May. This is said to have allayed the fear of economic watchers who are of the opinion that inflation in Nigeria can still be effectively tamed.

Higher Prices
Explaining the slight movement in percentage point, the National Bureau of Statistics (NBS) said the price increases seen in May were as a result of higher prices in groups that contribute to both the food and core sub-indices. Specifically, food prices edged higher to 9.7 per cent, up from 9.4 per cent in April.
Prices were pushed higher as a result of hikes in the bread and cereals, fish, dairy, fruits, and vegetable groups.
The price increases in the food sub-index were however weighed down by relatively slower increases in the meats, oils and fats, and potatoes, and yams and other tubers classes.
Prices measured by the “All items less farm produce” or core sub-index increased at a faster rate in May from April. Prices rose by 7.7 per cent (year-on-year), which was 0.2 percentage points higher from the rate recorded in April, which the NBS described as the highest year-on-year rate recorded for the core sub-index this year.

Groups that contributed to the increase in the core sub-index include furniture and furnishings, garments, rental prices, as well as liquid and solid fuels.
On a month-on-month basis, price increases in the headline index have risen and fallen since the start of the year. Prices increased by 0.78 per cent in May, higher than rates recorded in April by roughly 0.2 percentage points.

Analysts believed the latest inflation figure has underscored the resilience of the economy and that it has further shown that the economy was not doing badly especially when one factors in the anticipated liquidity glut in the run up to next year’s general elections.
“The fact that despite the anxiety over anticipated liquidity glut as the elections draw near, inflationary trend has been contained is a plus for the nation’s economic managers,” said a Lagos-based economic analyst.

Interestingly, economists from the Lagos-based diversified financial institution, Financial Derivatives Company Limited were so convinced by the improvement in virtually all the economic indices and had projected that Nigeria’s headline inflation in May 2014 would be unchanged from that of April at 7.9 per cent.
FDC’s optimism was largely hinged on the early crop harvest and favourable weather conditions last month.
However, the research firm sounded a note of caution, saying it is practically important to keep inflationary trend at bay for the rest of the year given the reality of economic development in the near term.
The firm said in a recent report that it anticipates resurgence in year-on-year (y-o-y) inflation in the next few months due to a number of factors.
According to the report, facts that will spur a rise in inflation in Nigeria include increase in prices of new cars; disbursement of capital vote (fiscal overdrive); steady growth in money supply (5.83 per cent annualised in April) and resurgence in currency pressures.

Inflation to Spike in Q2-Q3
“The correlation between the FDC Urban inflation and the national headline being 0.81 informed the use of our urban inflation as a proxy for the headline inflation.
“Based on this correlation, the national headline inflation is expected to increase from the current rate of 7.9 per cent to about 10 per cent in the near term if nothing is done to rescind the impact of emerging inflationary threats.

“Inflation gap, the difference between money supply growth and real GDP growth measures the level of anticipated inflation. Nigeria’s inflation gap in negative territory indicates that there is no immediate threat to inflation.

“However, recent growth in money supply (M2) at an annualised rate of 5.81 per cent puts the inflation gap at (–1.6 per cent) compared to March’s annualised M2 growth rate of (–13.42 per cent) with an inflation gap of –20.83 per cent. Real GDP growth in 2013 was 7.41per cent,” the FDC report said, adding that the change in the inflation gap is an indication that inflationary pressures are getting stronger.
In her opinion, Standard Chartered Bank’s Head of Africa Research and a well-known commentator on African markets, Razia Khan, said although both food and core inflation are exhibiting the fastest m/m increases seen since January, the impact of earlier foreign exchange weakness appears not to have been as pronounced as expected.

Pressure on Prices
According to her, there is evidence of upward pressure on prices. She said the increase in the CPI index seen in every month since March was a touch higher than the average for those months using the index rebased to 2009.  This, she said, does not signal an alarming degree of price pressure – it merely indicates that the trend in the coming months is more likely to be higher, rather than lower inflation.

Khan believed market conditions remain liquid as overnight rates continue to hover near the lower end of the corridor.  She noted that the FX rate has exhibited signs of pressure despite gains in the oil price related to the current tension in Iraq, explaining that for now, local factors appear to matter more.

She said, “Given this, we remain wary of inflation risks. The rise in the oil price does not provide sufficient reassurance that Nigerian inflation will remain low and well-behaved.
“The amount of pre-election spending remains the key factor to watch.  Should market conditions exhibit signs of even greater liquidity growth, there may be a case for more CBN tightening in response.  We expect inflation to continue to rise in the coming months.  Given the low base – y/y CPI was in single digits for all of 2013 helped by CBN tightening and favourable food price trends domestically – the risk is that we see a breach of 10 per cent before the year-end.”

In spite of this warning, observers still believe Nigerian economy is still solid.
“Returns and risk in investment are commensurate and capital will naturally fly where returns are more attractive. Historically, return on investment in Nigeria is massive,” said Abiodun Keripe, head, research and strategy at Elixir Investment.

Keripe adds that Nigeria’s demography of 170 million-plus people and the fact that the insecurity risk has been limited to the north give investors a reason to explore the business environment.
Already, the International Monetary Fund (IMF) is forecasting economic growth of 7.3 per cent in 2014 for Nigeria, up from 6.4 per cent last year.
The thinking in economic circles is that the single-digit inflation anchored on the tight monetary policy will continue to support inflow of foreign portfolio investments (FPIs) in the country, a report has stated.

Pressure on Government Revenue
A recent report by Augusto & Co argued that despite the prevailing favourable condition in the international oil market, output leakages are putting pressure on the government’s revenue position and affects accretion to the fiscal buffers.
“In the short term, the reduction in fiscal buffers and pre-election spending are factors that could affect the CBN’s capabilities in reining inflation as well as maintaining exchange rate stability.
“The insecurity in the food belts across the northern parts of the country occasioned by terror activities and clashes between farmers and cattle herdsmen, is also expected to push food prices higher, thus setting the food index on an upward trajectory.
Already, the organised private sector has passed a vote of confidence on the current administration as massive investments in the last two years, stability in macro-economic indices and various government incentives channelled towards the manufacturing sector resulted in improved performances recorded in the sector at the end of 2013.

MAN’s Vote of Confidence
The Manufacturers Association of Nigeria (MAN), in its economic review for 2013,  said manufacturing output increased by about 36.9 per cent, as against 19 per cent in mid-year report of the period under review.
According to the report, about 121 per cent increase was recorded for the same period (end of the year) in 2012, translating to N483.53 billion at the end of December 2013. This is against N353.2 billion recorded in mid-year of 2013.
The association attributed the improvement to several factors, which include stability in macro-economic indices, increased investment by operators and various government incentives channelled towards the sector.
The country’s real Gross Domestic Product (GDP), for instance, according to the report, grew by 6.93 per cent in the third quarter of 2013, which was higher than the 6.18 per cent in the second quarter of 2013, and 6.48 per cent in the third quarter of 2012.

 

 

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