Nigeria’s Policies-induced Cost-push Inflation Projected at 16%

Nigeria’s Policies-induced Cost-push Inflation Projected at 16%

Due to policies-induced rise in cost, the Asset and Resources Management Securities Limited has forecasted a sustained rise in inflation rate for the nation in 2020. In its projection, the investment firm estimated that the inflation rate would go north of 16% in 2020 amidst an unstable price level. Pundits have however noted that the increase in the average price level has mainly be driven by cost, rather than demand.

This would rather impact production cost, as well as employment level in the country. In the second quarter of 2020, gross domestic products dropped 6.1%. The plunge was mainly due to virus-induced lockdowns, then the unemployment rate crossed an all-time high at 27.1%. Recalled that headline inflation for the month of August rose significantly by 40 basis points as it printed at 13.22% year on year in August.

This translated to 23 basis points above ARM Securities estimate of 12.99%, spurred by an uptick in both food and core inflation, with the former leading the pack. Notably, analysts said this marked the highest pace of expansion in headline inflation since June 2018.

While analysts expect the green harvest season in the Southern region and in some Northern states to curb the pace of increase in food inflation, prolonged dry spell season, lean season as well as the lingering impact of the pandemic, weighed heavily on food prices. According to the Famine Early Warning Systems Network (FEWSNET), the lengthened dry spell in localized areas of Niger and Benue States resulted in the wilting of some crops.

To shed more light on this, ARM Securities stated that staple cereal prices including that of millet, maize, and sorghum are relatively higher than 2019 levels. This is also above the five-year average across the country.

Consequently, food inflation rose 51 basis points to 16% year on year, reflecting a 38 basis points increase in farm produce to 16.34% and a 7 basis points rise in imported food to 16.42%. Similarly, analysts explained that core inflation ticked 42 basis points higher to 10.52% year on year, mirroring increases across all core sub-indices.

For context, ARM Securities indicated that the firm witnessed expansions in HWEGF (+16bps), Transport (+41bps), Furnishing (+23bps), Clothing (+20bps), Health (+48bps), amongst other core sub-indices.

Akin to the annual numbers, the month on month numbers revealed headline inflation rose 10 basis points to 1.34% month on month and 20bps above our estimate of 1.14% month on month. However, core inflation led the pack with a 30 basis points increase to 1.05% month on month, while food inflation advanced 15 basis points to 1.67% month on month.

On the former, slight increases in Transport (+2bps), HWEGF (+2bp) and Clothing (+4bp) sub-indices anchored the rise. Meanwhile, ARM Securities indicated that increases in processed food (+3.27bps) and a basis point uptick in imported food drove food inflation higher.

Going forward, ARM Securities revealed expectation that the impact of regulations would outweigh base effects

The firm had stated that inflation will dance to the tune of the government regulations as they gradually get unveiled over the rest of the year.

Since March, a combination of devaluation in currency, restrictions in movement which led to elevated transport cost and adoption of the market-based pricing mechanism by the PPPRA left consumer prices on an upward trajectory.

In a surprising move, the increase in electricity tariff this month which was previously postponed till 2021 coupled with the deregulation of the Nigerian downstream sector further sets more fire to the already elevated inflation rate.

Both policies became effective on the 1st of September 2020.

On the former, analysts explained that the new electricity tariff translates to an average increase of 108%, which is higher than the tariff hike implemented in 2016. On the other hand, the ex-depot price for petrol now stands at N151/litre from N138.62/litre, taking the PMS retail selling price to a range of N155/litre to N160/litre.

Furthermore, ARM Securities noted that the adverse impact of elevated transport cost, dry spell season as well as recent flooding encountered in the north will place more pressure on consumer prices over the rest of the year.

For context, it said the recent release of water from the Goronyo dam and upstream floods from Niger Republic damaged infrastructure and cropping lands in Kebbi, Sokoto and Niger states.

“While the extent of this damage is yet to be ascertained, food harvest across these regions would likely be affected”, ARM Securities stated.

“We believe full deregulation of the downstream sector will take petrol prices to a range of N170/litre to N185/ litre before the end of this year.

“That said, coupled with the varying triggers highlighted above, we see inflation going north of 16% by year end.

“For the month of September, Inflation is expected to print at 14.29% and 2.00% month on month.

“These adjustments take our 2020 estimate to 13.52% from prior forecast of 12.56% year on year”, the firm explained.

Read Also: Growth: Structural Reform Should Precede CBN’s Easing Policy – Analysts

Nigeria’s Policies-induced Cost-push Inflation Projected at 16%

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