Wednesday, June 10, 2015 6.21 AM / FDC
Headline inflation in Nigeria is likely to increase to 8.8% from April’s 8.7%. This will be the highest rate of inflation recorded in 2015, if this forecast proves to be accurate; it will also be the highest since the impact of the subsidy reduction in 2012. This modest rise in inflation is surprising given the prolonged fuel scarcity, heightened insurgency activities of Boko Haram and the impact of the planting season.
The naira has been cumulatively devalued by 26% since October 2014; however, prices have only increased by 8.7%. The reason for this modest increase in prices includes a general reduction in global commodities imported by Nigeria. These include wheat, sugar, rice and palm oil. The fall in commodity prices have helped neutralise the devaluation impact. Another inflation mitigant has been the slowing growth in money supply which is now annualised 5.3%, way below the annual target of 15%. We believe that consumer resistance to price increases is also playing a phenomenal role in keeping inflation muted. The FBN PMI Index which shrank from 54 in April to 49.4 in May is evidence of inventory destocking by manufacturers and merchants. The PMI is a leading indicator of manufacturer’s view of market prices movement.
If the inflation rate jumps to 8.8% as predicted, when taken together with the under/unemployment rate of 24.1% will give Nigeria a misery index of 32.9%. This will be the base line for judging the performance of Buhari’s economic policies in the near future.
Urban Prices also Increased in May
Our Lagos urban inflation index increased to 12.37% in May, 1.18% from 11.19% in April. Typically, there is a lagged positive relationship between the headline and the urban inflation rates.
The y-o-y food and non-food indexes increased to 9.30% and 13.92% in May from 8.4% and 12.64% in the previous month respectively. The prices of pepper, vegetables, sugar, transportation, cooking gas and kerosene were noted to have influenced the increase in the general consumer price level. Most traders noted that there was low demand as well as consumers’ resistance to price increases despite the impact of the fuel scarcity on logistics.
What to Expect in June
In June, the headline inflation rate is expected to increase further due to the lagged impact of the severe fuel scarcity in May. Transport fares recorded over 200% increase in many parts of the country. Meanwhile, following the instability caused by the scarcity and the need to build up the fiscal buffers, the Buhari administration is likely to eliminate the subsidy regime in the near term. This will cause an initial spike in consumer prices. However, the impact of the anticipated increase in the inflation numbers may be muted by a favorable harvest season in Q3’15.
Likely Market Response
Interest rates have been driven mainly by the level of liquidity in the banking system rather than the persistent increase in the headline inflation rate. The increase in money supply is likely to be negated by the CRR weekly debits. Therefore we do not anticipate any change in the direction of interest rates .
The exchange rate has become more interest rate dependent than on inflation. We expect the naira to trade horizontally in June, but tilting towards a lower value if the external reserves fall below $29bn. However, if there is a swift removal of subsidies, the naira will stabilize and possibly appreciate marginally in the near term.
The stock market performance has been driven mainly by negative sentiment on earnings than on inflation. An increase in the rate of inflation is unlikely to be a catalyst for a correction in the near term. Investors are therefore likely to be indifferent to the news of an inflation increase.
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