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FDC Aligns With FSDH, Projects Headline Inflation To Creep Up To 18.4%

Proshare

Tuesday, December 13, 2016 1:04 PM / FDC

Headline inflation, the malignant tumor that is eating up the purchasing power of Nigerians, is expected to inch up marginally to 18.4%. This will be the highest level in 11 years.

The good news though is that if this forecast is correct, the incremental change in the price level is now down to a mere 0.1%. This means that the base year effect of 2015 is now losing steam and that we might witness a marginal decline in January.

A further decomposition of the inflation survey reveals a decline in the month-on-month inflation to 0.74% (annualized 9.30%). This trend validates the notion of a withering base year effect on inflation and a likely convergence of the monthly and yearly rates of inflation.



The Nigerian public is becoming more skeptical about inflation data released by the NBS and surveys by economists, including the FDC Think Tank. This is because anecdotal evidence conflicts with the published evidence. Many Nigerian consumers and manufacturers believe that inflation in Nigeria is more like 40%, almost double that of the empirical evidence.

The inconvenient truth is that, inflation due to supply shocks has been reinforced by structural bottlenecks that strangulate supply increases. This blunts the impact of increases in quantity supplied. On the price level, the other factor for this divergence in data is the composition and weighting of the retail basket. A basket of mainly price inelastic goods will show a higher rate of inflation than a composite basket of elastic and inelastic commodities.

Our November survey shows a strong seasonality factor pushing demand especially for festivity sensitive goods such as rice, turkey, vegetable oil and chicken. However, we noticed weaker demand in 2016 than earlier years. In other words this appears to be a much bleaker Christmas than 2015.

The breakdown of the findings show a conflicting direction of prices in the food basket for example pepper, tomatoes and onions showed significant price increases whilst the other items such as yam and noodles remained relatively flat. The non-food basket was flat, a reflection of its purely exchange rate and transportation cost sensitivity.  

Urban Price Movement
The urban index continues to mirror the transportation/logistics differential. It also reflects the relative price inelasticity of the urban elite who have limited time for bargaining. The FDC Lagos urban inflation index increased marginally to 12.45% in November.

This is an increase of 0.03% from the October rate of 12.42%. The year-on-year food index increased to 15.49% from 15.16% in October while the non-food year-on-year index decreased to 10.92% from 11.03%.



Possible Impact
The MPC do not meet until January 2017 and as such the impact of this marginal increase in inflation is likely to be more wage rate inclined. Trade unions and employers typically meet at the end of the year to negotiate on wage agreement.

Therefore, we speculate an acrimonious and bitter negotiating environment this Christmas.

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