High Energy Costs, Weak Currency Stoke Inflation Fears

High Energy Costs, Weak Currency Stoke Inflation Fears

Higher energy costs and weak local currency, a result of economic reforms by the Nigerian government are expected to stoke pressures on price level in the second half of 2023.

Already, investment banking firms have maintained a position that the consumer price index will worsen further after subsidy removal and the naira devaluation. Despite 725 basis points benchmark interest rate hikes, inflation pressure has failed to reduce.

While this calls for policy review, the apex bank has maintained monetary policy tightening as a core inflation-fighting tool at the same time when it normalises the banking sector cash reserves ratio.

Inflation started in August 2019 when erstwhile President Muhammadu Buhari closed all borders despite near zero comparative cost advantages in the local production of any goods passing through the nation’s borders.

Ahead of July’s official figure released by the National Bureau of Statistics (NBS), an investment banking firm, Afrinvest Limited, has estimated that Nigeria’s inflation rate would accelerate by 81 basis points in July to settle at 23.60%.

In its macroeconomic note, Cordros Capital said pressure on consumer prices would remain skewed to the upside in the near term. As a result, analysts at the firm forecast a 70 basis points increase in the inflation rate to 23.49%.

In June, Nigeria’s statistics office reported that the inflation rate settled higher at 22.79%, driven by a bucket of economic uncertainties that filter across key sectors.

The figure for the month came below market consensus.  Broadstreet analysts said the consumer price index record provided by the National Bureau of Statistics (NBS) excluded the impacts of subsidy removal on fuel.

This sparked criticism among market observers, casting doubts on the quality of the figure.  Recalling NBS figures against analysts’ expectations, Afrinvest noted that June consumer inflation surprised the market by coming in lower at 22.79% despite price shocks in the month.

Food prices rose significantly to a 73-month high of 2.4% m/m and a record 25.3% year on year, driven by weak domestic output and higher manufacturing costs.  Also, the investment firm recalled that core inflation pressure eased slightly to 1.7% month on month, leading to an annual inflation rate of 20.3% in June, up from 20.1% in May.

“For July, we project the headline inflation to increase by 2.5% month on month against 2.1% in June, and its 12-month average of 1.8%”, Afrinvest said in its market update.  To the firm, this monthly inflation print implies an annual consumer inflation rate of 23.6% as against 22.79%– which would mark the seventh consecutive increase.

Decomposing the broad performance, analysts at the firm said they anticipate strong core pressure amid sustained FX weakness and readjusted retail PMS price.

Thus, analysts said they anticipate an uptick of 2.1% month on month and 20.7% year on year in the core basket against the previous month’s print of 1.7% and 20.3%. Similarly, the investment firm expects food inflation to stay elevated at 2.5% month on month and 25.8% year on year.

“…we expect the planting season, adverse weather conditions, and lingering impact of crop disease outbreak to blunt the positive impact of the green harvest in the Southern region.

“Thus, farm goods inflation should increase to 2.7% month on month against 2.4% previously. For processed food, the pass-through impact of FX pressure, suspension of the Black Sea grain deal in Eastern Europe, and rising domestic input cost should sustain price pressure in July.

PAC Capital Limited analysts said they continue to maintain the stance that inflation numbers are set to rise albeit at a slower rate. In its note, analysts said that the subsidy removal is already taking its toll on transportation fares with its trickling effects on the prices of other items.

“…we expect the proposed palliatives, through the IMF $800 million supports, to provide a succour”.

However, the investment firm said the impact of this assistance may be marginal as the N8,000 cash to beneficiaries could not make up for the eroding purchasing power unleashed by the surging inflation.

The economy also cannot ignore the possible impact of increased money supply due to the decline in Cash Reserve Requirement for the Merchant Bank to 10% from 32.5%.

Beyond these bases, other policies such as the implementation of importation duties on selected goods and new taxes from the Finance Act, amongst others, will also contribute significantly to the increase in headline inflation in the near term, PAC Capital analysts said.

It was noted that except drastic measures are put in place to manage importation, the foreseen higher inflation by July may exert further pressure on Nigeria’s foreign exchange.

In its commentary, CardinalStone Partners said despite the shock numbers, it sees latitude for more inflationary pressures in the coming months partly due to the lagged impact of subsidy removal and its pass-through to broader prices.

Analysts said in addition, the recent uptick in parallel market rates – possibly stoked by seasonal demand- will likely add another layer of pressure on prices.

Analysts at Cordros Capital Limited expect pressures on food inflation to remain intact in July, as higher transport costs will likely continue to filter into food prices.

In addition, analysts said they understand that Russia is considering terminating the Black Sea grain deal -which expires on 17 July- as part of the agreement concerning the country is yet to be fulfilled.

“We expect the preceding to pose further risk to imported food prices in the near term”, analysts said. They noted also that July marks the beginning of the lean season in the north amid high flooding in the southern region. Thus, the food demand-supply gap is likely to remain wide.

Cordros Capital analysts said they expect food prices to rise by 2.10% month on month in July.

“While we acknowledge that the new administration has suspended the implementation of the 2023 Finance Act till September 2023, we still expect the core baskets to remain under pressure.

“Notably, given that the impact of the FX and fiscal reforms did not reflect much in June’s core inflation reading, we suspect that core inflation will likely rise faster in July”, Cordros Capital said. #High Energy Costs, Weak Currency Stoke Inflation Fears#

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