November 26, 2021 / 01:10 PM / by FDC Ltd / Header Image
Credit: FDC Ltd
Nigeria's official headline inflation fell again in October to 15.99% from 16.63% in September. This is the 7th consecutive monthly decline and a 10-month low. Most analysts had anticipated the sustained decline but were surprised by the magnitude of decline. Consumers were also dismayed as the official data seems to contradict market reality. In the last year, the average price of commodities in the Lagos market surged by over 50%
Inflation is projected to maintain its downward trend, closing the year at 14.3%. However, risks are elevated - increase in electricity tariffs (Dec 1), removal of fuel subsidy (early 2022), insecurity threats and exchange rate pass through effect. However, as the harvest season effect wanes and we enter into the yuletide season, we expect commodity prices to rise further as people stock up for Christmas. Exchange rate volatility at the parallel market is likely to keep imported commodity prices high. In addition, the price of a key imported commodity, wheat, is at a 9-year high of $870/bushel as dry weather conditions in parts of the US fuel global supply worries. The ripple effect will keep flour prices elevated in the near to medium term. This, along with money supply saturation on the back of increased electoral spending in 2022, will trigger a reversal in the inflation trend.
Monetary policy normalization in advanced economies will trigger capital flow reversals in emerging markets. Nigeria is likely to experience exchange rate volatility as a result which would further fuel imported inflation. Other inflation risks remain elevated as Nigeria continues to grapple with separatist agitations, supply chain disruptions and higher energy costs. Foreign-exchange controls on imported goods, for which domestic supply is inadequate, and conflict in the Middle Belt (Nigeria's breadbasket) will continue to keep inflation structurally high.