Dr. Yemi Kale, DG National Bureau of Statistics
DR. Yemi Kale, DG National Bureau of Statistics

Headline inflation tapers to 11.02%, lowest in 43-month

Headline inflation in the month of August 2019 declined on a year-on-year basis to 11.02% from 11.08% in July 2019.

Cardinalstone, Nigeria’s leading multi-assets investment management firm stated that the current inflation reading was largely in line with its 11.04% forecast and 8bps below Bloomberg consensus estimate.

It added that with this reading, Nigeria has now seen its lowest inflation reading in 43 months.

On a month-on-month basis, the headline inflation lowered to 0.99% from 1.01% in July 2019. Breaking down the sub-indices of the headline inflation, on a year-on-year basis, core inflation declined to 8.68% in August 2019, relative to 8.80% in July 2019.

The core inflation also tapered on a month-on-month basis to 0.67%, from 0.77% in July 2019. The decline in the core inflation to 8.68% was the lowest level recorded since June 2015 when the core inflation stood at 8.40%.

Food inflation stood at a double-digit rate of 13.17% year-on-year in August 2019, from 13.39% year-on-year in July 2019. Also, on a month-on-month basis, the food inflation declined to 1.22% from 1.26% in July 2019. The food inflation rate of 13.17% in August 2019 was the lowest recorded year-to-date.

The decline in the headline inflation to 11.02% in August 2019 was driven by a 22 basis points moderation in the food inflation (which contributes about 50% to the headline inflation) from 13.39% in July 2019 to 13.17% in July 2018.

The decline in food inflation was the third consecutive decline, on a month-on-month basis, since June 2019.

However, analysts postulate that the decline in food inflation was driven by the approaching harvest season, thus boosting food production, and lower spate of ethno-communal clashes including the farmers/herdsmen crisis in the major food producing regions in the country.

WSTC Securities noted that despite the improvement in food inflation, the figure yet remains high at a double-digit of 13.17%. Considering that core inflation stood at single digit of 8.68% during the period, it is safe to say that the relatively high food inflation has been a drag to the headline inflation.

“We believe that the sticky food inflation results from bottlenecks around food supply, some of which include transportation costs & other logistics challenges, storage, inefficient resource management, and low food system capacity. The highest price increases were recorded in bread & cereals; fish; meat; potatoes, yam & other tubers; and oil & fats”, the firm added.

Cardinalstone stated that the sustained temperance in inflation has been largely driven by swift moderations in food inflation -22bps to 13.17% year on year in August alone, with core inflation moderating by a cumulative 16bps in the last three readings.

“We attribute the observed softening in food price pressures to the positive impact of early harvests, which kept markets well supplied even in the lean season”, the firm added.

According to Famine Early Warning Systems Network (FEWSNET), this year’s harvests are expected to be average to above average across a broad section of the country except in pockets of conflict-affected areas in the North.

Elsewhere, the moderation in core inflation coincided with tamer price increments in clothing & footwear and Alcoholic beverage, Tobacco & Kola sub segments.

Analysts at Cardinalstone believe the ongoing moderation in inflation supports our average inflation projection of 11.12% year on year in 2019 estimate compared to 11.25% year to date, YTD, with higher food production from the main harvests likely to taper inflation further in the coming months.

Cardinalstone stated that despite the upside risk presented by the recent border closure, we hold the view that inflation is more likely to trend lower for the rest of the year given that imported food only accounts for 13.2% of Nigeria’s CPI basket.

The firm observed that while the trajectory of inflation lends credence to a more accommodative monetary stance, CBN’s recent preference for Open Market Operations (OMO) as the defacto liquidity management tool, together with the glaring upside risks to inflation at the turn of year, significantly reduces the likelihood of a modification to key policy rates at the next Monetary Policy Committee (MPC) meeting.

All roads are likely to lead to higher inflation in 2020. While we expect continued moderation in inflation through the year, we see several upside risks to inflation in 2020, Cardinalstone stated.

These risks include the impending implementation of higher electricity tariffs which is to be implemented in two installments: partial increase in January and a shift to full cost-reflective tariff in July.

This also include the proposed increase in VAT rate to 7.5% from 5.0%; the addition of items to the FX restriction list; stricter enforcements at the borders; and, to a lesser extent, the planned implementation of the minimum wage increase.

Beyond the risks mentioned, the recently constituted Economic Advisory Council, formed by President Buhari, is widely expected to suggest more pro-market reforms such as the liberalisation of exchange rate and the removal of existing petrol subsidies.

If implemented, the policies would, no doubt, result in short term inflationary pressures before long term beneficial impact materialises.

“We expect to see a relatively higher level of inflation in the near term, owing largely to seasonality effect and an expected rise in year-end business activities.

“However, we expect to see a rather mild uptick in core inflation, given our expectations of a stable exchange rate and energy prices during the period”, WSTC Securities stated.

Headline inflation tapers to 11.02%, lowest in 43-month By Oluwafemi Michael

VIAMichael Oluwafemi
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