Price Instability Threatens CBN’s Single Digit Inflation Target

Price Instability Threatens CBN’s Single Digit Inflation Target

Price instability, or persistent rise in average prices of goods is putting pressure on household income, couple with the fact that unemployment rate is at worst level since 2010.

Analysts have again projected that the dust is yet to settle as further increase is expected in the year.

Purchasing power of Naira has been under threat following the impact of the local currency devaluation and inflation rate.

Experts told MarketForces that price stability is unachievable in the short to medium term due to lower economic productivity.Price Instability Threatens CBN’s Single Digit Inflation Target

The issue of price stability, according to analysts, would be remain until foreign inflows into the country improves, and economic tempo rises.

While the Central Bank of Nigeria (CBN) sets 6-9% target, inflation rate in Nigeria rises to 28-month high of 12.82% in July.

This came on the back of sustained pressures in the food basket which drove consumer price index higher by 26bps from 12.56% in June, 2020.

Recalled that the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for July 2020, which showed inflationary pressures accelerated for the 11th consecutive month.

Chapel Hill Denham said the inflation print was a negative surprise, as it surpassed the firm’estimate of 12.66% year on year.

On a monthly basis, the headline index rose by 1.25% month on month  from 1.21% in June, also above analysts’ estimate of 1.07% for the period.

A look at the data shows that the higher inflation print was mainly against the backdrop of sustained pressures in the food basket.

This was the case despite the commencement of early harvest, while core inflation was relatively benign.

Food inflation printed higher by 31 basis points (bps) to 15.48% year on year from 15.18%.

On a monthly basis, the food index increased by 1.52% from 1.48% in June, deviating from the long observed seasonal trend of falling monthly inflation once early harvest commences in July.

Analysts said food inflation has been on an upward trajectory since August 2019, due to the cumulative effects of the border closure, COVID-19 induced supply chain disruption, and rising imported food inflation (16.4% in July) as FX scarcity mounts.

Specifically, the rise in the food index in July was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, oils and fats, and fish.On the other hand, core inflation eased by 3 bps to 10.10% from 10.13%.

On a monthly basis, the core index expanded at a slower momentum of 0.75%, down from 0.86% in June.

Despite the increase in petrol prices in July, the utilities and fuel division moved up only by 10bps to 8.0% year on year.

However, Chapel Hill said the firm saw continued pressures in the health (+50bps to 12.2%) and transport (+40bps to 11.4%) divisions, reflecting lingering impacts of COVID-19.

This period, the highest increases in the core basket were recorded in prices of medical services, passenger transport by air, pharmaceutical products, hospital services, and passenger transport by road.

Read Also: Nigeria’s Inflation Rate for July Hits 12.82%, says NBS

In its note, Chapel Hill stated that outlook is biased to the upside due to supply side factors.

We expect inflation rate to accelerate further in the near term, due to further pressures in the food basket until the main harvest season commences in September“, analysts said.

Chapel Hill said even at that, there are genuine concerns that the harvest may be lower-than-average due to COVID-19 induced disruptions during the planting season.

The firm explained that deregulation of the downstream oil & gas sector, which has led to increased pass-through of higher international oil prices and currency devaluation on retail pump prices.

We note that petroleum marketers recently raised retail prices of PMS by 3.5% to 148/litre.

Against this backdrop, we are currently tracking August headline inflation rate at 12.94% year on year“, Chapel Hill Denham stated.

Price Instability Threatens CBN’s Single Digit Inflation Target