Is the Decline in Inflation Grinding to a halt?


Thursday, September 07, 2017 / 9:58AM /FDC

Headline inflation declined margin-ally for the 6th consecutive month to 16.05% in July, despite the sharp increase in food inflation to 20.28%. Although historical, it is important to understand the trend especially be-cause the decline was infinitesimal. This raises the question of whether inflation has bottomed out or will continue to decline in the ember months. Currently the average infla-tion rate for the first 7 months in 2017 is 17.06%. Some analysts are project-ing a FY’17 average of 16.05%.

A quick look at the numbers show that the exchange rate dependent components of the consumer price index have sustained the downward trajectory, due to the stable ex-change rate. This means that as long as the forex market remains well funded (function of oil pro-ceeds) and the naira stays within the current range of N360-N370, im-port dependent commodities will continue to record slower increases in price level and even ultimately a decline.

The more worrying component which has muted the inflation de-scent is food inflation. Generally, food prices have remained sticky downward with few exceptions: old yam, garri and rice. However there are expectations of a bumper har-vest due to favourable weather conditions and this should impact positively on price level. The catch there is the time lag between cause and effect. Harvest season is usually towards the end of Q3 and into the fourth quarter. So we may not see any significant change yet.

Also, Christmas is coming up and manufacturers are beginning to raise letters of credit to meet their inventory for the festive season. So expect to see prices of imported commodities inch up towards the end of the year. This is also the pe-riod when there is an increase in the influx of people into the country as many Nigerians abroad return home to celebrate the holidays; leading to an increase in dollar supply and an appreciation of the currency.

Hence, the variable that carries a larger weight will determine the net effect on prices.

In conclusion, consumer prices are a function of expectations, and sea-sonality. The harvest season and increased dollar inflows will have a positive impact on consumer goods. However, the price uptick associ-ated with Christmas will dampen the anticipated decrease. Hence, infla-tion movements in the next four months will be marginal irrespective of the direction due to the net ef-fect of these factors.

Related News

Q2’17 GDP: Nigeria Creeps out of Recession
Finally, an End to the Recession
Stanbic IBTC Holdings Q2 2017 Results Review - Likely Easing of Cost of Risk In H2 Bodes Well
GDP Growth Up to 0.55% - Too Soon to Cheer
Nigeria on a U-Shaped Recovery
PMI - Marginally Slower Economic Expansion in August
Manufacturing PMI Stands at 53.6% in August 2017 from 54.1% in July 2017 - CBN
August 2017 Purchasing Managers' Index: Six Months In Positive Territory
Nigerian Economy Emerges from Recession; GDP Grows by 0.55% in Q2’17 from -0.91% in Q1’17
Headline Inflation to Slide Marginally to 16.03% In August 2017
A Recovery in Capital Imports in Q2 2017
We See an Uptick in Headline Inflation to 16.3% YoY in August – FBNQuest
Headline Inflation Declined Marginally to 16.05% in July 

Related News