Analysts Track 15% Inflation Rate for Nov. as Purchasing Power of Naira Drops
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Analysts Track 15% Inflation Rate for Nov. as Purchasing Power of Naira Drops

Known as dangerous to economic growth, Nigeria has continued to battle with cost driven inflation rate for 14th consecutive months despite the apex bank single digit target.

Driven by rising costs emanated from structural displacement and policy somersaults, a number of investment analysts said they have started tracking 15% inflation rate for November.

This is the highest point seen in the last 32-month according to inflation chart reading.

Over the consecutive period on increase price level, Nigerian local currency has suffered sharply despite the apex bank weekly intervention in the foreign exchange market.

Though market intervention was halted amidst economic lockdown, Naira has not fair really well since the Central Bank of Nigeria FX resumption.

Pundits have attributed rising inflation rate to economic shocks, land border closure despite widening gap in the nation’s agricultural output among other structural imbalances.

Consumer Price Index (CPI) report published by the National Bureau of Statistics (NBS) for October 2020 showed persistent pressures in consumer prices, amid supply chain challenges linked to public unrest in the month and an underwhelming harvest season.

Notably, headline inflation rate surged by 53bps in the month to a 32-month high of 14.23% year on year from 13.71% in September.

On a month-on-month basis, prices expanded by 1.54% from 1.48% in the previous month.

Chapel Hill Denham said, “The inflation print was a major surprise relative to our estimate of 14.0% and consensus forecast of 14.1%”.

Pressures were broad-based in the review period as core and food inflation spiked.

Core inflation spiked by 56bps to 11.14% year on year on an annual basis, and by 30bps to 1.25% month on month.

Chapel Hill Denham stated that this mainly reflects lingering impacts of COVID-19 disruption, weak FX liquidity, rising fuel prices, and recent supply chain challenges, due to public unrest in the month.

The impact was reflected as Health cost rose +50bps to 13.08%, Transport increased +45bps to 12.11%), Communication spiked +20bps to 9.39%) and Utilities and Housing grew +18bps to 8.48%).

According to NBS, the highest increases in the core basket were recorded in the prices of passenger transport by air, hospital and medical services.

These also include passenger transport by road, pharmaceutical products, motor cars, vehicle spare parts, maintenance and repair of personal transport equipment.

Others are hairdressing salons and personal grooming establishments, miscellaneous services relating to the dwelling, paramedical services and shoes and other footwear.

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Similarly, food inflation surged by 72bps to 17.38% on an annual basis and by 8bps on a monthly basis to 1.96% month on month.

It was noted that rise in the food index was caused by increases in the prices of bread and cereals, potatoes, yam and other tubers.

Others are meat, fish, fruits, vegetable, alcoholic and food beverages and oils and fats.

In its commentary, Chapel Hill Denham said outlook remains biased to the upside in the near term.

“We expect pressures in consumer prices to persist in the near term, due to structural supply-side challenges and energy price shocks”, the firm explained.

Chapel Hill Denham said, “Within the core basket, we expect to see a major uptick in November, owing to partial implementation of the service-based electricity tariff earlier in the month, which led to about 59% nationwide increase in electricity tariff for consumers experiencing minimum average power supply of 12 hours/day”.

These also include increase in fuel prices in November, particularly petrol, following the decision of NNPC to raise ex-depot pump price by 5.3% to N155.17 from N147.67/litre.

Even as curfews imposed during the public have been lifted, food inflation is expected to trend higher due to disappointing main harvest season due to COVID-19 restrictions during the planting season, incidences of flooding and security challenges.

In addition to this, there is lingering impact of the border closer, exchange rate restrictions by CBN.

“We are tracking November inflation print at 15.00% year on year and expect year-end inflation at about 15.2%”, Chapel Hill Denham estimated.

Strategic implication:

The firm believes that this sustained uptrend in headline inflation will have impacts on the monetary policy direction.

However, analysts noted that the movement in fixed income yields over the past 13 months has sharply deviated from the trend in consumer prices, against the backdrop of the dovish monetary policy bias of the CBN and liquidity glut in the money market.

It is observed that short term rates are nearly at zero, while bond yields are also close to record lows, with the entire bond yield curve below inflation rate by an average of 10%.

However, Chapel Hill Denham recalled that the CBN has made it clear in past MPC communiques that the institution’s view is that inflationary pressures are mainly driven by structural factors and outside the direct purview of monetary policy.

Hence, its decision to relegate the objective of price stability in favour of growth.

“The MPC is due to meet next week and we do not expect a change in this view, at least until the economic recovery gains a foothold in Q2-2021.

“As a result, we expect a status quo outcome with the policy rate likely to be maintained at 11.50%.

“However, as inflation marches towards 15% by year-end, potentially reaching 17% by Q1-2021, we believe it will become increasingly difficult for the CBN to justify this view”, Chapel Hill Denham stated.

Analysts at Meristem Securities Limited also expect inflation rate to swell further.

In the current month, Meristem Securities said it expects the aftermath of the protest-driven shock and energy reforms to amplify existing inflationary triggers, culminating in a 14.86% year on year rise.

Apart from higher demurrage costs for delayed goods at the ports, replacement of looted and vandalized items will make commodities more expensive, given the FX environment.

In addition, the firm stated that the increase in the wholesale price of Premium Motor Spirit (PMS) by the Nigerian National Petroleum Corporation (NNPC) could raise the pump price to ₦168 – ₦170 in the ongoing month, adding to existing pressures on commodity prices.

The year has seen new inflationary pressures compounding the challenges experienced earlier.

Following the effects of the VAT hike, a weaker naira, market-reflective energy prices and pandemic-induced supply chain disruptions, inflation has witnessed a continuous build up reversing gains made since 2017, as the country braces up for its second recession in five years.

Inflation could record its longest streak of consecutive upticks driven by both reforms and supply side shocks.

“Due to the spillover effects of the protests and higher fuel prices, we raise our 2020 inflation forecast to 13.19% as against 11.73% in 2019”, Meristem added.

Analysts Track 15% Inflation Rate for Nov. as Purchasing Power of Naira Drops