How the increase in headline inflation and misery index will affect investors and markets


Thursday, August 06, 2015 8:29 PM /FDC 

FDC is projecting a marginal increase in Nigeria’s CPI (headline inflation) to 9.3% in July. If this forecast proves accurate, it will be the eighth consecutive rise in inflation recorded in 2015. 


A few days ago the NBS confirmed a 2.4% increase in the combined unemployment and underemployment figures to 26.5%. This inflation rate will thus bring Nigeria’s misery index to 35.8%. It is now imperative that the administration aggressively pursues some economic quick wins before the political honeymoon ends.

In the article below, the FDC economic team analyzes the impact of the anticipated increase in the headline inflation on investors and the markets.

Inflation to nudge slightly higher in spite of temporary Naira strengthening
In spite of the volatility in the forex market and the Naira dancing around like a yoyo, consumer price inflation is only expected to nudge a bit higher to 9.3% (±0.1%). The last published figure for headline inflation in Nigeria was 9.2% for June 2015.  

We are forecasting this CPI rate based on our time series model. The NBS is scheduled to release the official inflation numbers on 18 August 2015, according to its website. Inflation in Nigeria has been increasing steadily in the last few months driven primarily by cost-push factors. These include transportation costs relating to fuel scarcity, exchange rate related costs (weaker Naira), alternative energy purchases and costs associated with carrying a higher inventory level. Most of these factors are transient in their intensity, but more fundamental in their origin. 

Fuel scarcity bites
The fuel scarcity for example has led to differentiated pricing across the country. The NBS in a recent survey (PMS Price Watch) says that average price of petrol across Nigeria in June 2015 was N112.13 per litre, which is 28.89% above the current official price. Furthermore, the decline in consumers’ purchasing power has also limited the effect of inflationary pressures. The decrease of FBN’s Purchasing Managers’ Index (PMI) from 56.0 in June to 50.6 in July indicates a negligible expansion in the manufacturing economy. A further examination of the PMI’s output and new orders sub-indices shows a reduction in manufacturing output and consumer disposable income. 

Naira strengthening, albeit temporarily
Though the value of the Naira in the parallel market depreciated significantly between June and July, the Naira has been appreciating in the forex market due to the suspension of dollar cash deposits into domiciliary accounts. This has led to an increased supply of dollar cash in the market, causing a temporary appreciation. The US dollar is now selling at N222 in the parallel market. The uncertainty in the forex market will be priced into the costs of goods, thus stoking additional inflationary pressures.

Unemployment spikes
With an under/unemployment rate of 26.5% and an inflation rate of 9.3%, Nigeria’s misery index will become 35.8%, a significant jump from the 33.1% in May. As the current administration of President Buhari is already in its third month in office, the honeymoon is fast coming to an end. Therefore there will be a push to achieve some quick wins by the new team

Higher Inflation across the whole of Africa

While inflation is generally increasing across Africa, inflation in Kenya and South Africa have defied market forecasts, which predicted a steeper rise in the inflation rates of both countries. Kenya’s inflation rate reduced to 6.62% in July 2015, 0.41% down from 7.03% in June 2015. This decrease was driven by the fall in Kenyan food prices as the food and non-alcoholic drinks segment declined by 0.60% due to the fall in the prices of cabbages, maize and potatoes. South Africa’s 4.7% inflation rate for June 2015, though an increase from 4.6% in May 2015, was less than market forecasts. The marginal increase in South Africa’s inflation rate in June 2015 was because of the slower pace with which the costs of food, housing and utilities rose. Ghana, on the other hand, had its inflation rate rise to 17.1% in June 2015 from 16.9% in May 2015. This rise was driven higher transportation costs and a weaker currency that made imports more expensive.

Urban prices slow down in July

The FDC Lagos urban inflation index decreased to 12.13% in June, down 0.34% from 12.47% in June. This is not in line with the trend in headline inflation.

The y-o-y food index increased to 12.24% from 11.44%, while the y-o-y non-food index decreased to 12.07%, from 12.99% in June. The decrease in the urban inflation was driven by the reduction in food prices as a result of an abundant harvest. Prices of tomato and yam decreased significantly in July, and we are expecting a further decline in August as we enter the peak of the harvest season.

Inflation outlook in August – (Flat)
In August, the headline inflation rate is expected to be flat as a result of a favourable harvest season, which is expected to reduce inflationary pressures coming from the food sub-index. Also, the recent temporary suspension of foreign currency deposits has led to a momentary appreciation of the Naira, which could lead to cheaper imports. There is availability of electronic dollars as against the supply of cash dollars which are used for transactions.  

Likely Market Response

Interest Rates

Given the decision of the CBN to maintain the status quo at its last MPC meeting, alongside the fact that interest rates have been mainly driven by the level of liquidity in the banking system rather an increase in headline inflation rate, we do not anticipate any change in the direction of interest rates.

Exchange Rates

The impact of a marginal increase in the headline inflation rate is expected to be neutral on the exchange rate in the near term. Brent oil which is a proxy for Bonny Light is trading at $49.31, sharply lower (22.54%) than the Q2 average of $63.66. Fundamentally, the Naira is likely to weaken as a result of the lower oil price and its impact on the trade balance.

Stock Market

When the Naira fell the stock market also declined sharply. In recent times the market has recovered. The impact of the inflation numbers on the stock market is likely to be neutral as the stock price movement will be more of a function of corporate earnings than inflation and interest rates.

MPC in September will be critical

In summary, the slight increase in the rate of inflation will likely be ignored by the CBN and other stakeholders. The focus will be on the trend in September before the next and crucial meeting of the MPC in Abuja.


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3.      Productivity Data Highlights Constraint On Nigeria's Growth Potentiai – Aug 04, 2015

4.      PMI Reading No 28: Decline in the Macro Headwind – Aug 03, 2015

5.      Underemployment rose by 11% in Q2 2015 amid sluggish economy - Aug 03, 2015

6.      Cause of Inflation this time - It is not demand pull but cost-push - Jul 16, 2015

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8.     DLM Estimates a Marginal Rise in Headline Inflation to 9.20% - Jul 10, 2015  

9.      June inflation expected to increase marginally to 9.1%  - Jul 3, 2015  

10.  CBN Releases Report on Monetary Growth and Inflation Dynamics - Jun 10, 2015   

11.   Inflation rises to 8.7% in April'15; the 5th consecutive month of a faster increasE – May 14, 2015

12.  Fx pressures not fully reflected in inflation - April 17, 2015


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