Inflation Defies Analysts’ Projections Reversing Rising Streak

Trading activities at a market in Lagos

Kunle Aderinokun

Despite the projections by analysts that the pace of increase of the consumer price index (CPI) would be reversed, the CPI, according to National Bureau of Statistics’ data, increased to 18.55 per cent in December 2016.

Analysts had estimated that the CPI, which gauges inflation, would reduce from 18.48 per cent of November but data released by NBS revealed that higher rent and energy prices have pushed inflation further by 0.07 percentage points to 18.55 per cent.

Out of the three firms of analysts namely, FSDH Research, Financial Derivatives Company (FDC) and The Economic Intelligence Unit of Access Bank, which released their forecasts, only Access Bank analysts predicted the same inflation rate for December as the previous month.

While analysts at FSDH had projected a marginal drop in inflation (year-on-year) to 18.44 per cent for December from 18.48 per cent (about 18.5 per cent) in November, the FDC analysts forecast that inflation would be slashed to 18.3 per cent in the review month.

According to FSDH, “We expect the December 2016 inflation rate (year-on-year) to drop marginally to 18.44 per cent from 18.48 per cent recorded in the month of November 2016.

“The expected decrease in the inflation rate will be driven by lower than anticipated price increases within the Food and Non-Alcoholic Beverages division, as well as the base effect,” they pointed out.

The analysts also stated that, the monthly Food Price Index (FPI) released by the Food and Agriculture Organisation (FAO) shows that the FPI remained relatively the same in December.

“The Index was marginally down by 0.07per cent, compared with its revised November figure. Year-on-year (YoY), it grew by 12.02per cent. According to the FAO, the performance of the Index was largely driven by a sharp fall in sugar prices.

“The FAO Sugar Index fell by 8.56per cent, on the back of the weakening Brazilian currency against the U.S. Dollar,” they disclosed.

The FSDH analysts added: “Also, favourable reports emanating from the main producing region (Central South) contributed to the fall in prices. YoY, the Index rose by 26.34per cent. The FAO Meat Price Index was down by 1.09per cent, as all meat categories recorded lower prices in December 2016. On the flip side, the FAO Vegetable Oil Price Index appreciated by 4.22per cent.

“The rebound was primarily driven by lower global inventory level for palm oil. YoY, the Index appreciated by 29.31per cent in December 2016. The FAO Dairy Index appreciated by 3.35per cent from November 2016, as a result of weaker dairy production in the European Union (EU) and Oceania.

“The Index recorded a YoY growth of 28.83per cent. The FAO Cereal Price Index increased marginally by 0.50per cent, mainly due to the increase in the prices of rice and maize. YoY, the Index declined by 6.25per cent.

“Our analysis indicates that the value of the Naira remained stable at the inter-bank market while it depreciated at the parallel market by 2.65per cent to close at US$/N491 from US$/N478 at the end of November. The depreciation in the parallel market led to an increase in the prices of imported consumer goods in Nigeria between the two months under review.”

Likewise, FDC analysts said “Nigeria’s headline inflation is forecast to slide to 18.3per cent in December, the first decline in 14 months.”

To them, “the direction of the inflation downwards will come as a relief to the monetary policy committee, which has been waiting for the change in trend for almost an eternity. After exhausting every arrow in its quiver, the Central Bank of Nigeria (CBN) had almost given up on the war against the indicator.”

While the analysts pointed out that, “Even if estimates actualise and inflation declines, it is still a mile away from the CBN’s comfort zone of 6-9 per cent,” they however added that, “A December decline coinciding with a sharp increase in the PMI is good news.”

According to them, “It might be an indication that consumer resistance to retail price increases may be driving prices down. It might also project that a high inventory level and borrowing cost environment are coaxing producers to bring down their prices.”

“The change in headline trajectory may come as no surprise when some fundamental factors are considered. First when looking at drivers of inflation, apart from the Keynesian demand pull and cost push factors, monetary influences are another major factor to push up or contract consumer prices.

“There is a positive relationship between money supply growth and rising inflation. Therefore, a contraction in money supply will trigger a tapering of rising consumer prices.

“The income constraint and sustained increase in productivity in the agricultural sector, observed in the economy, also serve to reinforce the anticipated change in inflationary trend.

“While many other indicators have declined dramatically (e.g. purchasing power and the value of the naira) agricultural productivity has helped support gross domestic output with the sector enjoying two consecutive quarters of sustained positive growth.

“The anticipated change in the inflationary trend can serve as good news to the Nigerian public who have sought respite from Nigeria’s economic woes.

“However, there are certain core components of the consumer basket that may increase. Diesel prices have maintained a persistent increase, which in turn feeds into costs of production and logistics (cost push factors). Diesel prices were selling at an average rate of N260/ltr in December, up 62.2per cent YTD,” the analysts added.

However, The Economic Intelligence Unit of Access Bank estimated that inflation rate (year-on-year) in December would remain at 18.5 per cent, the same as in November.

According to them, “Our methodology adopts an autoregressive analysis of past prices, while it recognises all the assumptions used by the National Bureau of Statistics (NBS) in its computation of monthly composite consumer price index (CCPI).”

Pointing out inflation forecast drivers, the analysts stated that, “The moderate easing of pressures on the parallel FX market in December following the central bank’s special intervention FX auctions in late November and early December contributed to the stability seen in the price index in December.”

They also indicated that, “Price movements for major commodity groups in the food basket remained unchanged, while the slight price increases in some commodities were offset by downward price adjustments in others. Based on an independent survey, vegetable oils, tomatoes, and noodles saw slight uptick in price, while the price of rice, plantain and potatoes trended downwards. Food commodities recorded mixed price changes due to combined effects of increased supply of certain domestically produced food items and increased demand generated during the festive season.”