Weak Consumption, Reduce Imports Halt Inflation Uptrend -Analysts

Weak Consumption, Reduce Imports Halt Inflation Uptrend -Analysts

Weak consumption spending, low importation from the manufacturing sector have been noted to be key drivers of Nigeria’s disinflation record, supported by large base year effects.

In the last three months, Nigeria’s inflation rate uptrend has halted for the third consecutive month following the pandemic-induced economic stress in the fiscal year 2020.

The outbreak of coronavirus in the first quarter of 2020 disrupted the supply chain enough such that much money in circulation was pursuing fewer goods – a situation that was negatively impacted by the land border closure despite low home base productivity capability.

Headline inflation rate maintained an uptrend throughout last year and hit 19 months uprising before it began to retrace in April 2021 for the first time.

In its macroeconomic report, Afrinvest attributes the slowdown to a large base year effect and weak demand as the inflation rate dropped to the lowest in 4-months.

The investment firm said the moderation is in line with its projection.

During the week, Nigeria’s headline inflation rate moderated for the third consecutive month by 18bps year on year in June 2021 to settle at 17.75% from 17.93% according to the CPI data released by the National Bureau of Statistic, NBS.

The moderation was mainly driven by the food inflation sub-component which fell by 45 basis points year on year to 21.8% from 22.3% in May 2021, while the core inflation sub-component also slide by 5 basis points to 13.2%.

“To us, the year on year moderation in the food inflation was mainly driven by high base-year effect, caused by the restriction of inter-state movement between April and June 2020 (due to COVID-19), which drove food inflation up by 62bps over the period”, Afrinvest said in the report.

However, analysts noted that on a month on month basis, the food inflation rate rose by 6 basis points to 1.1% in June from 1.05% in May which reflects the combined impact of the recent hike in diesel price and Naira devaluation.

Diesel price was adjusted to ₦295 a litre from ₦225 and the market witnessed fresh devaluation as Naira rate jumped to ₦410 a dollar from ₦379 as CBN unified official exchange rate with autonomous rate.

On the other hand, analysts said they attribute the year on year decline in the core inflation rate to weak consumer demand, which in turn weakened large-scale importation by manufacturers.

“Besides, we believe the recent ban on flights from India, Turkey, Brazil, and South Africa over the surging cases of the Delta variant of COVID-19 played a part in taming the core inflation rate, due to a drop in demand for flights to these destinations in June”.

Consequently, NBS data shows that the core inflation rate fell sharply by 42 basis points in June to 0.8% from 1.3% in May – making it the sharpest decline in 7-months.

“In July, barring any uptick in energy prices (especially PMS), we expect further moderation in the y/y headline inflation rate to 17.6%, to be driven mainly by the modest decline in prices of some staple food items (e.g. maize, wheat, and rice) as we move into the harvest season of these crops.

“In addition, we believe the recent decline in the inflation rate will skew the voting pattern of the CBN monetary policy committee (MPC) members in favour of maintaining “status-quo” on monetary policy parameter at the next meeting in less than a fortnight”, Afrinvest stated.

Weak Consumption, Reduce Imports Halt Inflation Uptrend -Analysts