Analysts Optimistic of Further Slide in Inflation

Following the decline in the consumer price index (CPI) for two consecutive months, analysts are predicting further downward movement in the coming months. But they are cautious in their optimism about the CPI trajectory. 

The National Bureau of Statistics released the data for the CPI, which measures inflation, last Thursday. According to NBS, the CPI increased by 17.26 per cent (year-on-year) in March but at a slower pace as it represented a decline by 0.52 per cent points from  the 17.78 per cent recorded in February.

The March headline inflation, which declined for the second consecutive month on a year-on-year basis, according to NBS, represented the effects of stabilising prices in already high food and non-food prices as well as favourable base effects over 2016 prices. “It is also indicative of early effects of a strengthened naira in the foreign exchange rate market. Price increases were recorded in all COICOP divisions that yield the Headline Index,” the agency added.

NBS, however, explained, “The major divisions responsible for accelerating the pace of the increase in the headline index were housing, water, electricity, gas and other fuel, education, food and alcoholic beverages, clothing and footwear and transportation services.”

On a month-on-month basis, the headline index increased by 1.72 per cent in March 2017, 0.23 per cent points higher from the rate recorded in February, the agency also stated. “The Food Index increased by 18.44 per cent (year-on-year) in March, slightly down 0.09 per cent points from rate recorded in February (18.53) per cent driven by increases in the prices of bread, cereals, meat, fish, potatoes, yams and other tubers and wine, while the slowest increase in food prices year on year were recorded by Soft Drinks, Fruits, Coffee, Tea and Cocoa,” it pointed out.

The headline index is made up of the core index and farm produce items. Processed foods are included in both the core and food sub-indices, implying that these sub-indices are not mutually exclusive.

The pace of increase in the headline index, however, ran contrary to the projections of analysts. For instance, analysts at Financial Derivatives Company Ltd had forecast that headline inflation would in March decline for the second month to 16.4 per cent (representing some 1.38 percentage points decrease), as a result of further waning of the 2016 base year effects. In the same vein, analysts at FSDH Merchant Bank estimated that the March 2017 inflation rate (year-on-year) would drop to 16.52 per cent (1.26 percentage points decrease) from 17.78 per cent recorded in the month of February 2017. But analysts at 

The Economic Intelligence Group of  Access Bank Plc came close with a projection that the  inflation rate (year-on-year)  would moderate downwards to 17.1 per cent in March 2017 from 17.8 per cent in February 2017, showing a decline of 0.70 percentage points.

Nevertheless, in the wake of the March inflation figures release, economic analysts and market watchers have registered their thoughts.

In his view, Executive Director, Corporate Finance, BGL Capital Limited, Femi Ademola, said the decline in inflation in the review period was not surprising. “Expectedly, it was due to the high base effect over 2016 prices and the curtailed demand due to the drag in economic activities. Although economic activities have improved lately and so demand increasing, the moderating exchange rate effectively tempered the rate of increase in prices,” he noted.

Ademola, therefore, projected, “Inflation in 2017 is expected to be low compared to 2016.” This, he pointed out, “is due to the combination of high base rate, moderating exchange rate and improving liquidity to manufacturers. In addition, the commencement of harvesting period will lower food prices; thus supporting the falling inflation. Inflation is likely to decline to below 15 per cent in the coming months.”

Similarly, Director, Union Capital Markets Limited, Egie Akpata, stated that the drop in CPI was not unexpected due to the base effect. Akpata, however, added that like last month, month-on-month inflation rose in March as it did in February, which “shows that the inflationary pressures in the economy are still very much at play.” Given this scenario, he projected, “Marginal reduction in CPI combined with rising month-on-month inflation will mean that the CBN is unlikely to make any changes to MPR at the next MPC.”

According to him, “Interest rates in the market are driven by liquidity and so are unlikely to trend down solely because of this inflation report. On the contrary, FX sales by CBN, OMO auctions and other administrative rules are likely to cause market interest rates to rise on the short term.”

For the Chief Executive Officer, The CFG Advisory Limited, Adetilewa Adebajo, “The upward trajectory of cost push inflation has clearly lost momentum as the economy has fully absorbed and adjusted to the energy price spike that triggered inflation.”

He cautioned, “We, however, need to see a sustained decline in the headline inflation numbers through half year 2017 to make a proper call on downward inflationary trend.”