Inflation Predicted to Drop Marginally in June

By Obinna Chima

After an almost unstoppable rise in headline inflation to a record high, the economy may be entering an era of declining rates of inflation, analysts have predicted

For the Financial Derivatives Company Limited, the inflation rate for June 2016 expected to be released today may see the Consumer Price Index (CPI) drop slightly from 15.6 per cent in May, to 15.5 per cent.

“If this estimate turns out to be accurate, it will raise some fundamental questions as to the direction of inflation and possible level of interest rates in the money markets. Headline inflation in Nigeria had almost been loose cannon, defying most rules of economic gravity and logic.

“The root cause of the near hyper inflation rate can be traced to supply shocks at-times attributable to artificial scarcity compounded by uncertainty in the forex markets.  The Big question therefore is whether this drop in inflation is a blip or a point of inflection.

“Economic history has shown that disinflation (a period of declining inflation) is usually a result of adaptive expectations.  The theory of adaptive expectations assumes that people form their expectation of future inflation on the basis of previous and present rates of inflation and gradually change their expectations as experience unfolds,” the FDC stated in a report.

In the same vein, the Economic Intelligence Unit of Access Bank Plc preditced inflation rate (year-on-year) to moderate downwards to 15.4 per cent in June 2016.

They explained that their methodology adopted an autoregressive analysis of past prices, while it recognised all the assumptions used by the National Bureau of Statistics (NBS) in its computation of monthly composite CPI.

“Our expectation for a downtick in inflation rate for the first time in 2016 is based on an anticipated downward movement in the food sub-index and core sub-index. The slowdown in the pace of advance in the food sub-index would be driven by decline in the prices of food items such as rice, tomatoes, and vegetable oil on the back of availability of petrol which may have aided transportation and distribution of these items.

“The core index should also descend marginally due to slight change in consumer behaviour witnessed during the review period towards imported goods. Therefore, weak demand for imported items is expected in June as higher prices in the previous month may have caused cutbacks in consumption spending,” they added.

On their part, FSDH Merchant Bank Limited expects that June 2016 inflation rate (year-on-year) would drop marginally to 15.39 per cent.

They anticipated the marginal drop to come from decrease in the prices of tomatoes, beans and rice. The Food Price Index (FPI) that the Food and Agriculture Organisation (FAO) released this month showed that the FPI increased for the fifth consecutive month. The Index was up in June by 4.22 per cent, compared with the revised value in May as all the sub-indices increased except for vegetable oil index. The increase in the FPI also represented the highest month-on-month increase over the last four years.

“Our analysis indicates that the value of the naira depreciated at the interbank market and the parallel market by 29.64 per cent and 0.28 per cent. The Naira lost N83.87 at the interbank market to close at U$/N282.97 from U$/N199.10 at the end of June.

“The implementation of the flexible foreign exchange policy was responsible for the huge loss in the value of the Naira at the inter-bank market. We believe the depreciation in the inter-bank foreign exchange rate did not translate to an increase in domestic prices because most transactions were earlier carried out at parallel market exchange rate.

“The prices of food items that FSDH Research monitored in June 2016 dropped on the average compared with May 2016. The prices of tomatoes, Irish potatoes, rice and beans were down by 38.41 per cent, four per cent, 3.33 per cent and 2.56 per cent, while the prices of Irish potatoes, onions, vegetable oil, palm oil, fish and yam increased by 8.33 per cent, 6.67 per cent, 5.56 per cent 5.56 per cent, 1.96 per cent and 0.46 per cent,” it added.