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Inflation to Maintain Its Upward Trajectory; to Rise to 18.2% - FDC

Proshare

Wednesday, November 09, 2016 10:33 AM / fdc

Our Year-on-Year (YoY) headline inflation forecast for the month of October is estimated to increase marginally to 18.2%. This is a 0.3% increase from the previous month’s rate of 17.9%.

We are also forecasting a month-on-month inflation rate of 0.67%, which if annualized is 8.38%, approximately 1.92% lower than the September’s level. If our estimate is correct, this will be the highest YoY inflation level in 11 years.

At its September meeting, the CBN expressed concerns about rising inflation, citing this as a reason for maintaining its contractive stance.

Given that there is major clamour for lower interest rates and a stimulus package as antidotes to the recession, the reduced monthly inflation rate may sound like music to the ears of the doves in the committee.


Forex market
At the interbank market the naira appreciated by 2.5% to N305/$ during the month. At the parallel market, the naira appreciated by 1.05%, closing at N470/$ at the end of October from N475/$ in September. This appreciation was due to improved dollar sales from International Money Transfer Operators (IMTO).

However, following the market absorption of the limited Diaspora remittances, dollar scarcity passed through to domestic prices.

Baked Goods
The Association of Master Bakers and Caterers of Nigeria (AMBCON) recently increased the prices of bread, biscuits and other pastries by 15%, citing higher input costs as the reason. This is in line with the recent price hike of essential products.  

Urban Price Movement
The FDC Lagos urban inflation index decreased to 12.38% in October. This is a decrease of 0.73% from the September rate of 13.11%. The decline in our urban index is due to consumer resistance in the market.

The year-on-year food index decreased to 15.04% from 16.27% in September while the non-food year-on-year index decreased to 11.03% from 11.51%.



Consumer behaviour in October
Consumer resistance is beginning to intensify as incomes and habits change. Prices of substitutes are beginning to climb whilst products with elastic demand are falling. Nigeria’s inflation in 2016 has arisen due to supply shocks.

Outlook: Festive season and consumer expectation
Typically, consumer prices tend to increase towards the end of the year due to rising demand for goods and services for the Christmas festivities. In some cases, artificial scarcity is created to push prices up.

Furthermore, in anticipation of higher prices, consumers tend to revise their expectations and demand, thereby inevitably increasing prices.

However, lower disposable income has reduced consumers’ ability to demand more. Thus, consumer resistance has become increasingly dominant in the market.

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