Friday, December
11, 2020 01:17 PM /by FDC Ltd/ Header Image Credit: FDC Ltd
Based on our market survey and regression analysis,
headline inflation is estimated to increase by 0.57% to 14.8% in November. If
this happens, it means that inflation will rise for the 15th consecutive month.
Our analysis also points to an increase in all the inflation sub-indices. Food
inflation is projected to rise to 17.5%, core to 11.3% and month-on-month to
1.5%.

The consumer price index (CPI) has steadily increased
since September 2019, largely due to money supply saturation, supply-side
challenges and cost push factors. The closure of the land borders, heightened
insecurity in the food producing states and more importantly slow disbursement
of forex and rationing limited commodities supply. This combined with money
supply growth (3.53%), supply chain disruptions, higher logistics costs and
electricity tariff hike exacerbated inflationary pressures. More so, November
is the first month in which the impact of the increase in the price of PMS and
a partial rise in electricity tariffs will feed into the inflation basket.
The Federal Government has announced a N5 per litre
reduction in the pump price of Premium Motor Spirit (PMS) effective December
14. Although, this could slightly ease pressures on consumers' disposable
income, it is highly unlikely that transporters will reduce their fares as a
result of the price fall. It also raises fundamental concerns about the deregulation
of the downstream petroleum industry especially at a time when global oil
prices are rising.
Since the liberalization of the downstream oil &
gas sector, petrol price has increased by over 30% to N170/ litre.
The CBN has intensified efforts towards achieving
price and exchange rate stability through increased forex supply and
introduction of special bills. An increase in forex supply will have a positive
impact on output. The special bills, which qualify as liquid assets on banks' balance sheets, will serve as a 'replacement for cash' for 90-days. This will
help mop up market liquidity, push up interest rates and taper inflationary
pressures.
SSA Regional Trend -
Mixed movement in inflation
Inflation trend across Sub-Saharan Africa was mixed.
Three of the countries under our review recorded lower inflation rates while
the other three posted increases. The inflation trajectory was largely
determined by food price movement, transport costs and exchange rate value. The
monetary authorities left their monetary policy rate unchanged at their
respective meetings. This is aimed at moderating risks to financial stability
while supporting output growth. At the same time, it will allow the impact of
the previous policy measures to be fully transmitted.

Concluding Thoughts
Inflation will continue its upward trend in December
due to supply chain disruptions, exchange rate devaluation, forex restrictions
and increased festive demand. The continued rise in inflation will be a major
consideration at the MPC meeting in January 2021. The committee may be forced
to change its current policy stance and adopt a tighter monetary policy.

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