Wednesday, July 13, 2016 5.25PM/ DLM Research
Background to our forecast
The headline inflation for June 2016 is expected to be released by the National Bureau of Statistics on the 16th of July 2016. Significantly surpassing overall consensus estimate, the headline inflation rate for May 2016 increased to 15.58 percent from 13.72 percent recorded in the previous month.
This represents the fourth consecutive month of a faster increase due to higher prices across all divisions which contribute to the index. Higher electricity rates and energy prices remain key drivers of inflationary pressures seen during the month further supported by higher food prices on the back of the lingering spill over effect of the nation’s exchange rate on imported food items and the drawdown of inventories across the country (fig. 1).
However, on a month-on-month basis, the pace of price increases rose considerably by 110bps to 2.80 percent in May 2016 reflecting resurging inflationary pressures after the respite in rates seen in March and April.
The food index was higher by 14.86 percent up from 13.19 percent recorded in the previous month due to price increases in imported as well as domestically produced foods with the highest price increases seen in bread and cereals, vegetables and ‘sugar, jam, honey, chocolate and confectionery’ groups. Similarly, the core inflation index rose by 15.05 percent from 13.35 percent in April 2016.
We estimate a marginal decline in headline inflation to 15.53 percent year-on-year in June 2016; down by 5bps from 15.58 percent recorded in the preceding month (fig.2). This in our view will be primarily driven by slower rises in the food index. Our model also shows a movement in the food and core sub-index to 204.3points and 196.3points respectively in June 2016. This translates into a food and core inflation of approximately 14.71 percent and 15.06 percent respectively.
Inflationary pressures to subsist in the short term. Whilst we note the respite expected in June inflation figures, we see the likelihood of upward price movements in the coming months given structural constraints which in our view would not necessarily respond to monetary tightening. In our opinion, the need to stimulate investment and economic growth using fiscal policies cannot be over-emphasized.
This would support employment, boost food production and prices will become more stable in the near term. Furthermore, we are of the view that the successful operation of the Inter-Bank Foreign Exchange Market is crucial to easing some degree of inflationary pressure.