Rising Inflation
Nova Merchant Bank Limited

‘FX Scarcity, Supply Chain Disruption Support Rising Inflation’

Analysts have explained the trend behind rising headline inflation rate to include scarcity of foreign exchange, disruption in supply chain among other reasons.

However, analysts’ consensus estimates show bias for further rise in consumer price index which measure inflation rate trend.

Rising Inflation
‘FX Scarcity, Supply Chain Disruption Support Rising Inflation’

In a report, Nova Merchant Bank said the impact of foreign exchange scarcity and supply chains disruptions became more evident on the core index in the month of May.

In the period, core prices reached the highest level last seen in August 2018.

Analysis of the Bureau of Statistic data revealed that core index grew by 14 basis points (bps) to 10.12% year on year.

Nova said this reflects the impact of interstate travel restriction on prices of essential items and feed through of the Naira depreciation on prices of imported foods and other imported components.

Specifically, key components of the core basket expanded.

These start with imported food which spiked +2 bps to 16.26% year on year. Transport was up +32 bps to 10.66%, Communication moved by +13 bps to 8.47%, Health surged +40 bps to 10.66%, clothing +8 bps to 10.40%, amongst others.

Elsewhere, while the bountiful harvest during the off season (April and June 2020) kept market well supplied with farm produce largely flat at 15.03%, the supply chain disruptions necessitated increase in prices of processed foods by 11 bps to 14.8%.

In a completely different twist from the inflation, much of the expansion in MoM inflation in May.

This emanated from faster increase in food prices 24 bps to 1.42% MoM – which then defied the impact of the bountiful dry season harvest due to feed through of higher transportation cost and associated increased demand during Ramadan.

Particularly, farm produce rose 40bps to 1.53% MoM -which is not unrelated to Ramadan demands, to outweigh the decline in processed foods (-151bps to 0.23%) over the same period.

Overlaying the twelve-month average inflation rate on average fixed income yield of 6.52% and the closing rate of the 364-Day NTB at last week’s auction of 4.02% translates to a negative real return of 526 bps and 77 6 bps respectively.

“We see the trend in inflation in the month of June, mirroring similar patterns in April and May, albeit at a moderate level given the limited demand for farm produce.

“We expect the restriction of interstate travels and Naira depreciation to continue to drive prices of essential items upwards.

“All told, we expect the consumer price index to decline 7 bps to 1.11% MoM, with headline inflation expanding to 12.44% in June”, the Merchant Bank stated.

Headline Inflation Rate Rises to 12.40% in May

Also, the likely implementation of the higher electricity tariff in July, coupled with expectation of persistent Naira volatility, elevated transportation cost due to social distancing policy and higher cost of essential items are among the driving factor.

Nova said it expects average inflation rate for 2020 to settle at 12.6% on our base case.

GTI Securities Limited in outlook for second half of 2020 said Nigeria financial assets will be more attractive to foreign buyers/investors due to weaker exchange rate.

On the negative, the firm support that domestic inflation rate will rise significantly due to Nigeria’s over dependence on imported semi and finished items.

‘FX Scarcity, Supply Chain Disruption Support Rising Inflation’

Story on FX Scarcity…written by Ogochi Ndubuisi