Thursday, April 07, 2016 1.28PM / fdc
We are projecting a significant increase of 0.7% in the March inflation number to 12.1%. This will be the third consecutive monthly increase this year. The month of March was unique as the fuel scarcity intensified and higher transport costs filtered through to commodity prices such as beans, tomato and pepper.
While our initial time series analysis projected an increase of 0.4%, the severity and longevity of the prevailing fuel scarcity has distorted price levels. Our retail study showed that prices of many consumer goods have remained stubbornly high and in some cases increased in spite of consumer resistance.
The factors that are contributing to the spike in inflation include seasonality, cost push factors, money supply and forex shortage. These factors while transient in nature are becoming more permanent. As these factors grow increasingly embedded, they are making consumers panic. Anticipated inflation is more important because of the pass through effect of increased demand and expectations of higher prices on current prices.
Impact of a sustained level of high prices
The dichotomy between urban and rural prices may persist given the impact of rising transport costs and exchange rate pressures on urban prices. The price of diesel, a major determinant of food transportation costs, has increased to N130 per litre.
Inflation likely to remain high in April
As the exchange rate uncertainty continues, consumer prices are expected to remain high. In addition, with fuel scarcity expected to persist till next month in spite of NNPC’s April 7 deadline, transportation costs will continue to be elevated. Therefore, we expect inflation to still remain in the region above 11%.
Regional Inflationary Trend
The inflationary trend across SSA is a mixed bag. Specifically, South Africa recorded an increase in its consumer price levels while Uganda and Kenya had lower inflation rates. South Africa’s inflation rate increased from 6.2% in January to 7% in February, due to increasing costs of food, transport, alcoholic beverages and miscellaneous goods and services. Uganda, on the other hand, reported an ease from 7% in February to 6.2% in March, due to a slowdown in energy and food prices. Kenya’s inflation rate also slowed from 6.84% in February to 6.45% in March due to a deceleration in the food index.
African Central Banks moved in different directions. Six tightened while 33 held rates. An increase in interest rates is a conventional tool for fighting inflation.
Urban prices accelerated moderately in March
The FDC Lagos urban inflation index increased by 0.32%, from 10.68% to 11.00%. This was driven by the significant increase of 0.32% in the food basket and a 0.31% jump in the non-food basket.
The year-on-year (YoY) food index increased to 12.56% from 12.23%, while the YoY non-food index increased to 10.21%, from 9.90% in February. We expect the ongoing planting season to affect food supply in coming months.
Likely Market Response
Both NIBOR and treasury bills rates have responded to the increase in the MPR and the trend is expected to persist, as financial institutions adjust their rates upwards. 91-days treasury bills rate is up from 4.85% to 5.99%. Average prime lending rate is 16.72% while maximum lending rate is 26.73%.
Oil price is currently trading at $39pb after a 3-week stint above $40pb. We expect the outcome from the OPEC meeting on April 17 to have a bearing on oil price and production. The current external reserves level is $27.9 billion. Though higher interest rates should encourage capital inflows to the country, the uncertainty in the forex market has kept investors on the sidelines.
In line with the inverse relationship between interest rates and the stock market, the hike in the monetary policy rate had an initial negative impact on stock prices. However, the market is driven more by corporate earnings. A further increase in inflation will likely be interpreted as a pointer towards higher interest rates and thus additional negative pressure on stock prices.