| Nigeria Economy |    1244 VIEWS  |
| Nigeria Economy | |
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Friday, December 20,
2019 / 09:32 AM / FDC Ltd / Header Image Credit: bftonline
Headline Inflation Up, Month-on-Month Inflation Down
Oh No!! Headline inflation spikes again in November
As
widely expected and consistent with analysts consensus, headline inflation
increased by 0.24% to 11.85% in November. This is the 3rd consecutive monthly
increase and the highest level in the last 19 months. Cumulatively, the
consumer price index has increased by 0.83% since August. Unlike in October
2019, core inflation (inflation less seasonal factor) increased this time by
0.11% to 8.99%. This confirms that the uptick in the general price level is not
driven by seasonality alone. Other principal factors responsible for rising
inflation include, border closure, speculative trading and money supply
saturation.
Rising inflation could induce a change in the monetary policy stance
The CBN
introduced a rash of guidelines aimed at reducing interest rates and boosting
lending to the private sector. While this is targeted at stimulating economic
growth, there is no empirical evidence to validate a positive correlation
between increased credit to the private sector and economic growth in Nigeria.
At the primary market, T/bill yields across all tenors have fallen sharply
below the inflation rate, resulting in negative real rates of return. The
continued increase in headline inflation at a time of steady depletion of the
external reserves could induce a change in the monetary policy stance of the
CBN.
Inflation Data Breakdown
Monthly inflation down marginally to 1.02%
For the
first time in six months, month-on-month inflation (a more reflective measure
of current prices) moved in the opposite direction of headline inflation. The
index declined to 1.02% (annualized 13.00%) from 1.07% (annualized 13.54%) in
October. This suggests that the border closure impact is beginning to wane.
This is because news of the possible re-opening of the land borders in Q1'20
has prompted the sales of hoarded goods, thus reducing the pressure on prices.
The price of a 50kg bag of local rice declined by 10% to N18,000 in November.
At a time of policy making apprehension, a reduction in the month-on-month
inflation will soothe the nerves of many more.
Food inflation spiked by 0.39% to 14.48%
In the
last few years, food inflation had been driven by seasonality and other factors
such as flooding. This has now been compounded by the 4-month border closure.
The year-on-year food sub-index soared by 0.39% to 14.48% in November. However,
the month-on-month food index declined to 1.25% from 1.33% in October. The rise
in the annual composite food index was largely due to an increase in the price
of commodities such as bread, cereals, oils and fats, tubers, meat and fish.
The spike in the price of rice led to a shift in consumption pattern from cereals
to tubers, which are produced locally.
Core inflation up 0.11%
The
year-on-year core inflation (inflation less seasonal factors) stood at 8.99% in
November, an increase of 0.11% from 8.88% recorded in October. On a monthly
basis, the index also increased by 0.05% to 0.79%. This was in spite of the
relative stability in the exchange rate. The exchange rate was stable across
all markets in November. At the parallel market, the naira traded between
N359/$-N360/$.
The
items that recorded the highest price increase include cleaning, repair and
hire of clothing, hospital services, hairdressing saloons and personal grooming
establishment, tableware and household utensils, vehicle spare parts, repair
and hire of footwear and shoes. Core inflation is 0.14% below the 364-day
primary market T/bills rate of 9.13%. This is indicative of a positive rate of
return on investment.
Rural and Urban inflation also increased
In
November, both year-on-year rural and urban inflation indices increased to
11.30% and 12.47% from 11.07% and 12.20% respectively in October. However,
urban inflation rose at a faster pace than rural inflation. This is happening
at a time when the national average price of diesel declined by 0.49% to
N225.08/liter. On a month-on-month basis, both indices declined marginally by
0.01% and 0.08% to 0.98% and 1.07% respectively.
State-by-state analysis - Kwara state is the best performing state
Kwara
state had the lowest inflation rate of 9.70%, followed by Abuja (10.30%) and
Imo (10.43%). The highest level of inflation was recorded mainly in the North
West - Kebbi (15.40%), Sokoto (14.58%) and Niger (14.15%). In the last six
months, Kebbi state has underperformed all other states as that with the
highest rate of inflation. Higher inflation rate erodes consumer purchasing
power and reduces return on investment. Hence, the state could be a potential
red flag for rational investors.
Outlook
The
increasing price trend since Q3 is likely to continue into December and early
2020. The policy makers are likely to respond by using special debits and
stabilization securities as remedial measures in the short run. However, since
the MPC will be meeting on January 20/21, the CBN may use this opportunity to
formally change the monetary policy stance by resuming a tightening cycle
again.
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