Demand and Supply Shocks From COVID-19 Keep Inflation Higher for Longer

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Monday, July 06, 2020 / 04:50 PM / PwC Nigeria / Header Image Credit: Business Day

 

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Continued Rise In Inflation: Staying Higher for Longer

Headline inflation rose by 12.4% year-on-year in May 2020 - the highest in 26 months - from 12.3% in April. The continued rise in headline inflation was partly caused by the supply shocks to commodity prices and the fallout from the COVID-19 pandemic. These factors have kept inflation rate above its long-term rate of 11.9%.

 

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On a month-on-month basis, headline inflation rose the fastest since July 2018 (23-month high) by 1.2% in May 2020. This was due to significant disruptions to domestic and global supply chains, on account of the lockdown measures brought on by mitigating the pandemic's spread.

 

Food Inflation Holds Steady Above Non-Food Inflation

Food inflation has consistently remained above non-food inflation, except for 2016 when non-food items were heavily exposed to heightened exchange rate risks.

In May 2020, food inflation rose marginally to 15% year or year. This does not imply that food prices tapered in the month under review but the persistent increase in food prices has raised the base factor.

Non-food inflation rose to 10.1%y/y from 9.98%y/y. This is because demand for non-food items was mostly subdued, as the impact of the lockdown affected most non-essential goods and services. For instance, restaurant and hotel inflation fell from 0.9% in April to 0.8% month-on-month in May. Alcoholic beverages and tobacco also dipped from 0.86% to 0.84%, while the education, clothing and footwear inflation indices were largely flat.

 

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Outlook For H2 2020: Base Effect And Waning Disposable Income To Push Prices On Both Sides

Barring a second wave of the pandemic, which could further threaten outlook for global economic growth, coupled with the absence of major shocks to food supply in Nigeria, inflation outlook for rest of the year could be influenced by two factors. Firstly, the elevated base effect, and secondly, waning household incomes. The first factor is likely to have a greater impact.

Hence, PwC estimates that headline inflation will average 12.2% in 2020 compared to 11.4% in 2019. This could likely impact the monetary policy objective of price stability.

 

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Impact Of The Inflationary Trend On The Nigerian Economy

In conclusion, we review how various economic units are likely to be impacted by the rise in inflation rate going forward:

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Strategic Approaches To Put A Lid On Consistent Upward-Flexible Commodity Prices

We recommend the following to curtail the persistent rise in prices:

  1. Deliberate effort to provide adequate support to the agricultural and food processing sectors.
  2. Ensure a functional and effective price regulatory system.
  3. Provide adequate supply-chain mechanisms to facilitate unrestricted supply of food and other essential items.
  4. Massive support to the real sector of the economy, ranging from adequate funding to inclusive tax incentives.
  5. Ensure monetary and fiscal policies' foster stability on the supply side of the market.

 

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