Nigeria’s Inflation Slowdown Contradicts Global Trend, Firm Says
Nigeria’s inflation rate slowdown contradicts the global trend, says CardinalStone Partners Limited in a recent macroeconomic note. For sixth months, the headline inflation rate has been on the decline despite pressure on prices.
While the Central Bank adopts a ‘wait and see’ policy to control the inflation rate, central banks in the frontier markets tackle inflation pressure with higher interest rates. At the monetary policy meeting, CBN said the inflation jump was driven by supply chain disruptions.
With similar experience, interest rates have already risen in Angola, Armenia, Azerbaijan, Belarus, Georgia, Pakistan, Paraguay, Sri Lanka and Tajikistan, among others, Fitch said in a report.
Though experts noted that the declining inflation rate has narrowed negative real return on fixed-income investments, CardinalStone Securities hinted in a macroeconomic note on Monday.
Nigeria’s headline inflation slowdown 38 basis points in September to 16.63% from 17.01% in August, data from the National Bureau of Statistics released last week showed.
The slowdown marked the sixth consecutive month of disinflation in the country, flatters by base effect in 2020 following the pandemic outbreak. Nigeria’s had recorded 19 consecutive months of inflation uptrend before the first moderation was recorded in April 2021.
For the 12-months readings in 2020, the consumer price index that measures inflation trajectory was on the rise, keeping the real return on fixed income securities negative.
Even though the current headline reading is ahead of Bloomberg consensus of 16.5%, its moderation further narrowed the negative real return on fixed-income investments, according to CardinalStone.
The firm said, however, market watchers are likely to pay greater attention to government borrowing plans, CBN’s disposition to liquidity environment, and auction stop rates in framing their expectations for yields for the rest of the year.
It explained that the recently released bond auction calendar revealed plans to cut down the average monthly paper supply to between N150 billion and N180 billion for October through November and N100 billion to N120 billion for December.
The firm noted that the plan is against the mean of N243 billion in the previous quarter.
It said the DMOs substitution of the 2027s and 2036s with 2026s and 2037s bonds, which are both premium bonds, suggests that realized cash value could be higher than the planned numbers in the calendar.
In any case, the DMO has maintained an overselling pattern at recent bond auctions, with the September 2021 raise resulting in an allotment 1.85x higher than the amount offered, CardinalStone added.
The firm expressed that given the CBN’s greater tolerance for liquidity since Q3-2021, the impact of short-covering activities, and relatively sticky stop rates at auctions, the potential domestic borrowings for 2021 will likely be carried out at near current yield levels.
Farther out, it said potential election-related concerns, roll-over risks, and high government borrowing plans point to more material yield increases in 2022.
Domestic inflation moderation in contrast to global trend:
Using the global yardstick, CardinalStone explained that the moderation in domestic inflation appears contradictory to the global inflation trend. The firm said for context, while domestic food inflation has been tapering, data from FAO indicates that global food prices are nearing their 10-year peaks, fueled by harvest setbacks and Chinese demand pressures. CardinalStone projects a further moderation in headline inflation to 16.34% year on year in October 2021 on the sustained impact of the base effect.
However, it said the potential commencement of the main harvest in some parts of the country, particularly in the North, is unlikely to materially tame month on month inflationary pressure, a view premised on the already highlighted currency impasse, energy-related concerns, and possible festive-induced demand pressures in the coming months.
Headline inflation continued its year-on-year descent in September 2021, tapering 38 bps to 16.63% on the sustained impact of the high base effect. In line with recent trends, this high base effect was glaring in the food segment, wherein price pressures moderated by 81bps to 21.0% despite an insecurity-induced month on month inflationary surge of 20bps to 1.26%.
CardinalStone analysts noted the insecurity malaise, combined with flooding and lower access to inputs, resulted in below-average harvest output across most parts of the country. It said headline moderation also clouded a worrying surge in core inflation, which reached a 53-month high in the review month after rising by 34 basis points to 13.74% with month on month uptick of +47 basis points to 1.24%.
“We link the sustained increase to the spillover effect of currency pressure and the notable jumps in the prices of major refined petroleum products”.
On the latter, a 10.52% sharp rise in the cost of cooking gas and 14.57% uptick in the cost of diesel may have negatively impacted Housing Water, Electricity. As energy prices shoot upwards to record high in the past month, the gradual reopening of economies has triggered a demand surge which is now impacting the supply chain globally, thus resulting in logistic backlogs.
Based on this, consumer prices are trending sharply upwards which in turn might weigh on economic gains achieved so far, Meristem Securities said in a pre-inflation note. The firm however noted that some countries are recording a disinflation, though still above the threshold.
In the US, inflation figures moderated to 5.3% from 5.4% in July for the first time since October 2020, according to analysts at Meristem Securities. “While this buttresses the Feds view of inflationary factors being transitory, the committee hinted a tapering of its asset purchase program soonest as against raising interest rate”.
Analysts observed that a different scenario is playing out in the Euro-zone as prices continue to overshoot sharply above target, reaching a 13-year high in August to 3.2% from 2.5% year on year in July. #Nigeria’s Inflation Slowdown Contradicts Global Trend, Firm Says.
Read Also: Nigeria’s Headline Inflation Pressure Slowdown to 17.01%
