Election Spending May Worsen Inflation Outlook

As inflation continued its upward trajectory in December, experts predict a further rise particularly as the general elections draw closer, reports James Emejo

Fueled by increases in consumer prices including food and services, the Consumer Price Index (CPI), which gauges inflation, increased to 11.44 per cent (year-on-year) in December 2018 compared to 11.28 per cent in the preceding month.

The 0.16 percentage points increase from November estimates resulted from increases recorded in all the divisions that determine the headline index.

The National Bureau of Statistics (NBS), in its latest inflation estimates for the period under review, stated that core inflation was unchanged from the 9.80 per cent recorded in November.

On month-on-month basis, the core sub-index increased by 0.50 per cent in December, down by 0.18 per cent when compared with 0.68 per cent in November.

The highest increases were recorded in prices of domestic services and household services, dental services, garments, narcotics, major household appliances whether electronic or not, medical services, cleaning, repair and hire of clothing and tobacco.

The average 12-month annual rate of change of the index was 10.51 per cent for the twelve-month period ending in December, representing 0.19 per cent points lower than 10.70 per cent recorded in the preceding month.

Also, food inflation was recorded at 13.56 per cent in the month under review compared to 13.30 per cent in November.

According to the NBS, the composite food index rose by 13.56 per cent in December compared to 13.30 per cent in November.

The rise in the food index was largely caused by increases in prices of soft drinks, fish, bread and cereals, oils and fats, coffee, tea and cocoa, meat, milk, cheese and egg, vegetables, potatoes, yam and other tubers.

On month-on-month basis, the food sub-index increased by 0.81 per cent in December, down by 0.09 per cent points from 0.90 per cent recorded in the preceding month.

The average annual rate of change of the food sub-index for the twelve-month period ending in December over the previous twelve-month average was 14.35 per cent, 0.45 per cent points from the average annual rate of change recorded in November (14.80) per cent.

In addition, the urban inflation rate increased to 11.73 per cent (year-on-year) in December from 11.61 per cent in November, while the rural index increased to 11.18 per cent in December from 10.99 per cent in the preceding month.

Inflationary pressures often constitute adverse impact on monetary policy as it affects price stability and also necessitates for tightening of monetary policy instruments.

In the process, it compounds credit to the real sector particularly small businesses which find it difficult to borrow at high interest rates.

High inflation also has the potential to cause an artificial devaluation of the country’s currency as it loses purchasing power and value and affects exchange rates.

Unfortunately, the scenario will ultimately translate to more hardship for Nigerians and further dampen efforts to reduce poverty.

This explains why the trajectory of the headline index had been of serious concern for monetary authorities particularly central banks.

The Central Bank of Nigeria (CBN) had been struggling to push inflation to single digit through several interventions, but prices of commodities had gotten out of hands in recent times.

Nonetheless, there are yet increasing concerns that inflation could bite harder in subsequent months especially as the country approaches the general election because more money will be flooded into the economy as politicians spend more money to secure victory, a development that could lead to more liquidity in circulation, an essential ingredient for inflation.

Also of particular concern for analysts is the issue of the proposed minimum wage increase for workers, which is also expected to lead to further inflationary pressures.

Commenting on the inflation report and future outlook, Nigeria’s first professor of Capital Market and the President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said he expected the headline index to further increase in January.

According to him, the uptick in the CPI figure for December should not come as a surprise considering that the month is characterised by increase in the demand for goods especially food.

“It is what I call the ‘Santa Claus’ effect. This explains why the rise in the inflation rate from 11.28 percent in November 2018 to 11.44 per cent in December came from the increase in the volatile food index from 13.30 per cent to 13.56 per cent, while the core index remained same at 9.8 per cent.”

He added:“It is also vital to note that the food items that increased in price were chiefly those that are usually in high demand during festive periods such as soft drinks, fish, cereals and tubers.

“I expect the ‘Santa Claus’ effect to linger into January 2019, which is likely to record a higher inflation rate. This will however begin a gradual climb down from February or by March this year.

“Expected improvements in food supply, power and transport infrastructure in particular as well as stability in exchange rate given the country’s huge external reserves needed to defend the naira will help the government achieve its single digit inflation target of 9.98 percent contained in the 2019 budget.”

Also, a source told THISDAY that the country may yet witness further accentuation of inflation headwinds if CBN was unable absorb the current pressure in forex demands and adjust the currency after election in February.

According to him, NBS reported that headline inflation rose to 11.44 per cent year-on-year in the month of December 2018, from 11.28 per cent year-on-year in the month of November 2018.

“On a month-on-month basis, headline inflation declined by 6 basis points to 0.74 per cent, from 0.80 per cent.

Higher food prices drove the headline inflation due in large part to increased consumer spending in festive season of December.

“Locally-produced food prices rose by 13.56 per cent in December 2018, relative to 13.30 per cent in November 2018. Increased food prices in 2018 suggest the impact of election-induced spending,” he pointed out.

He also said,”A sustained increase in headline inflation is anticipated, albeit at a slower pace. Headline inflation may rise further in January largely due to election-related activities, as the 2019 General elections draw closer and moderate from March.”

Further commenting on the latest inflation figures, analysts at Cordros Securities Limited stated that, “With minimum wage still hanging in the air, we expect the dual impact of slight uptick in core inflation and faster deceleration in food basket to midwife a reversal in the headline inflation trend in January.”

They added in a report obtained by THISDAY that on account of a steeper decline in demand for farm produce following the end of festive season, they anticipate that month-on-month food inflation would moderate slightly by two basis points to 0.79 per cent.

“However, whilst we expect forex to remain largely range-bound, together with tame energy prices, we see scope for mild uptick in the m/m core inflation as election-related spending intensifies. Overall, we look for January m/m headline inflation of 0.73 per cent translating to year-on-year figure of 11.37 per cent.

“Further, we reiterate the implementation of the new minimum wage, currency devaluation, as well as petrol and electricity price hikes, as notable upside risks to inflation in 2019, with year-end forecast of 13.55 per cent year-on-year.”

On its part, Cowry Assets Management Limited predicted further upward pressure on general price level of goods and services in January 2019 as presidential election campaigns intensify.

However, as the Monetary Policy Committee of the CBN converge for its first meeting of the year this week, inflation is likely to be the focus of its deliberations and may compel the apex bank to adjust key monetary instruments to counter the emerging threats to price stability.