Friday, January 08, 2021 / 09:33 AM / By
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Headline inflation, a hydra-headed monster that has
eroded the disposable and discretionary income of consumers, is estimated to
increase by 0.51% to 15.4% in December 2020. This will be the highest level in
37 months, driven mostly by forex rationing, output and productivity
constraints, higher logistics and distribution costs. The cheery news is that
the rate of increase in the general price level is expected to decelerate. This
could imply that the re-opening of the land borders and the harvest of
commodities such as tomatoes and onions is beginning to taper pricing
pressures. Our survey also reveals a decline in the month-on-month inflation to
1.2% (annualized 16.71%) from 1.6% (annualized 21.17%) in November.

2020 Was a Bleak
Christmas
Our December survey shows a strong seasonality factor
pushing demand especially for festivity-sensitive goods such as rice, turkey,
vegetable oil and chicken. Traders and manufacturers took advantage of this to
increase commodity prices but not as much as in the previous year. This is
largely because of weak aggregate demand in 2020 relative to 2019. Consumer
disposable income has been negatively affected by the hike in electricity
tariffs, general reductions in subsidies and improved tax mobilization. The
breakdown of the findings shows a mixed movement in commodity prices. While the
price of tomatoes, onions and rice declined, items such as palm oil, noodles,
chicken and turkey recorded price increases. Hence, food inflation is expected
to rise at a slower pace to 18.5% in December. The increase in the domestic
food basket is in line with the FAO food price index, which rose by 2.2% to
107.5 points in December, mainly due to higher cost of dairy and vegetable
oils.
The non-food component of the inflation basket also
increased, reflecting the impact of exchange rate devaluation and higher
logistics costs.
Low interest rate
environment: Impact on consumption
Typically, low interest rates dis-incentivize savings
and serve as an incentive to consume. This is because the proportion of income
that is not saved is usually consumed. However, it was observed that while the
artificially low interest rates significantly affected investors especially at
a time of galloping inflation, its impact on consumption was muted as lending
rate remained sticky downwards.
Recovery trajectory
faster in countries with interest rates above rate of inflation
Inflation across the SSA region is more to the upside
in December 2020. This was largely due to an increase in the prices of food and
alcoholic beverages. However, a noticeable trend is that countries that
maintain interest rates higher than the rate of inflation tend to have a faster
pace of economic recovery and sustainable macroeconomic stability. South Africa
for instance, recorded an improvement in its growth rate to -6.1% in Q3'20 from
-17.1% in Q2'20

Concluding Thoughts
The CBN target rate for inflation is 6-9%. The
projected rate of inflation (15.4%) will be 6.4% higher than the ceiling. This
inflation rate will be a major consideration in the determination of the stance
and the level of the monetary policy rate (MPR) at a crucial meeting of the MPC
in January. The CBN has maintained in its rhetoric that an inflation rate above
12% is growth retarding.
Credits
* This post was first published on FDC Economic Bulletin on
Thursday, January 07, 2021.

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