FSDH, United Capital others forecast increase in headline inflation
As the Nigerian Bureau of Statistic is prepared to release inflation figure for May, some investment banking firms have released different views on the direction of changes in general prices of goods and service for the month of May. While some think inflation rate for the month would decline, other forecast possible increase in headline inflation. It could be recalled the inflation rate for April rested at 11.37, while average rate for the 12-months period closed at 11.3%.
Ahead of the release of May 2019 inflation data, Afrinvest projected a slight moderation in headline inflation to 11.3% year on year in May from 11.4% due mainly to a high base effect. The firm said this despite an expected uptick in month on month inflation to 1.0% in May from 0.94% in the previous month.
“Our forecast is mainly driven by sustained food price pressures which would drive month-on-month food inflation higher to 1.3% from 1.1% in the previous month. This would leave food inflation marginally lower but broadly unchanged at 13.7% year on year. Meanwhile, the month on month increase in food inflation is consistent with historical trends observed during the planting season.
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“We believe insecurity in Northern Nigeria due to insurgency and herder-farmer conflict would continue to pressure agricultural output and in turn prices”, Afrinvest reckoned.
United Capital Plc forecast that inflation would rise. It said that a spree of data is expected to be released by the NBS this week, part of which includes, May-19 CPI and inflation reports as well as the Terms of Trade data for first quarter of 2019. We maintain our forecast of an uptick in the headline inflation rate for the month of May, largely driven by pressure on food inflation amid planting season activities.
Also joined in the uptick stance on changes in general prices of goods and service, Meristem Securities projected 8 basis point increase. It estimates that the headline inflation rate would settle at 11.45% , representing an 8bps rise from 11.37% reported in April.
It observed that on the domestic front, PMI data released by the CBN for the month of May 2019 indicated sustained consumer spending, evidenced by 2.9 points decline in the stock of finished goods. New orders, however, registered a decline of 0.30 points, which it attributed to the increase in input prices up by2.00 points, thus slowing production.
It also noted that its food price surveys indicated increases in prices, citing the significant demand pressure observed in May, which we attribute to the Ramadan preparations, and the reduced level of harvest of agricultural commodities.
Then, FSDH Merchant predicts that inflation rate would soar to 11.39% in May. The firm noted that If FSDH Research’s May 2019 inflation rate forecast comes true, Nigeria may record the highest inflation rate figure since January 2019.
Rising headline inflation would not be good news for the economy or the purchasing power of Nigerians. Most people say they would not appreciate a situation where the prices of consumer goods increase faster than the expected increase in the approved National Minimum Wage.
“We expect the May inflation rate to further increase marginally to 11.39% from 11.37% recorded in April 2019. In addition, we expect the month-on- month change in the Consumer Price Index (CPI) to increase by 1.10% in May 2019, the highest since January 2019. With the onset of the rainy season, we have observed upward pressure on the food component of the inflation basket”, FSDH noted.
According to the firm, the major driver of the expected increase in the inflation rate is the increase in food prices, due to the seasonality effect typically associated with the onset of the planting season. Security challenges in some food producing regions in Nigeria reduce the supply of food items, leading to an increase in prices. The current inflation rate is higher than the 6% – 9% target set by the Central Bank of Nigeria (CBN).
Thus, given current realities, the inflation rate will remain above the CBN’s target in the short-to-medium-term. This may reduce the real yield on fixed income securities.
The estimate is however supported by the price monitor that FSDH Research conducted on certain food and non-food items in May 2019 which shows that most prices increased in May compared with April. A cursory look at the movement in prices at the international market and its likely impact on prices in the local market demonstrate an increase in imported inflation. That is prices of goods using imports as raw materials.
The Food Price Index that the Food and Agriculture Organization (FAO) of the United Nations published for the month of June 2019, shows that the prices of some food items increased. The prices of milk, butter, cheese, maize and meat increased on the international market while prices of oils, wheat and sugar declined.
Most of the increases recorded on the international market were mainly as a result of limited export availabilities and improved global import demand. Meanwhile, the value of the Naira at end-May was N360.43/US$ compared with end-April N360.40/US$ indicating a marginal loss of 3kobo in the value of the Naira. The depreciation in the Naira coupled with the rise in the prices of food items on the international market mean an increase in the local price of imported food items.
FSDH said that it considers the CBN may pursue economic growth at the expense of the inflation rate in the short-term. It may however, adjust its monetary policy tools such as Open Market Operations (OMOs) to reduce excessive supply of cash in the system.
It also note that one of the ways to reduce Nigeria’s inflation rate in a sustainable manner is to improve the infrastructure in the country. Good transport network, good storage facilities, measures to increase farm yields, provision of securities and strategies to ensure linkage between the farmers and the industrial sector will increase the supply of food items, increase profit margin and lower the inflation rate.
