Spike in inflation rate continues, as headline inflation rises to 15.6%

Proshare

Tuesday, June 14, 2016 8.47PM/ Dexter Analytics Research 

The National Bureau of Statistics reported this morning that in May, the Consumer Price Index (CPI) which measures inflation recorded a relatively strong increase for the fourth consecutive month in 2016.  

The Headline index increased by 15.6% (year-on-year), 1.9% points higher from rates recorded in April (13.7%).  

The increase in rates in May relative to April reflects an overall increase in general price level across the economy as all divisions which contribute to the Headline index increased at a faster pace in May.   

Year on year, Electricity rates as well as other energy prices continue to manifest as key drivers of the Core component of the CPI.

 

Core Inflation up by 15.1% y-o-y, and 1.7% m-o-m
The Core sub index rose to 15.1% in May, up by 1.7% points from rates recorded in the previous month. The reported increase in core inflation for the month was largely due to major increases seen in the Passenger Transport by Road, Liquid Fuel (kerosene), Fuels and Lubricants for Personal Transport Equipment (Premium Motor Spirit) and Vehicle Spare Parts groups.  

Food Inflation witnesses sustained pressure, settles at 14.9%
The Food sub index increased by 14.9% in May, up by 1.7% points from rates recorded in April as all major food groups which contribute to the Food sub-index increased at a faster pace driven by higher food prices in Fish, Bread and Cereals, and Vegetables groups for the second consecutive month.  

In addition, the FX pass-through is evident in the 18.6% spike recorded in the imported foods index. Draw down of inventories across the country also continue to push food prices higher after a brief respite in rates in March and April 

Implications
On Fixed Income Investments- in the short term, we expect investors to continue to price in higher risk premium across the Fixed Income markets. Also, giving the expected high yields on fixed income instruments, if the status quo remains, it could have a negative impact on the equities market, as the fixed income market may be preferred to it by investors. 

On Equities market- The Nigerian equities market witnessed an ‘against the run of play’ rally in May 2016 as the All Share Index rallied by 10.3% in the month; this marks the third strongest gain for the month of May in recent times. The signing of Federal Government’s 2016 budget, the decision of the Monetary Policy Committee of the Central Bank of Nigeria to adopt a “flexible exchange rate” with the CBN intervening in critical transactions, as well as the liberalization of the downstream sector of the economy were key reasons for the rally in May.
 

However, the delay in releasing the blueprint for the implementation of the flexible exchange rate has dampened investors’ confidence and plunged year to date returns back in the negative region as it closed at -5.37% (13/06/16). Considering the plurality of factors that have moved the market of late, the newly released inflation rate is not expected to have a major impact on the equities market. 

Going forward- spike in inflation rate is expected to continue in June
We maintain our earlier position that the sustained spike in inflation has driven by cost-push factors. The identified cost push factors which have continued to drive inflation figures upwards include but not limited to: 

  • the price of PMS which sells between N140-N165 on average across the country
  • The continued scarcity of FOREX which has been a major force in driving the prices of imported products upwards.
  •  The recently announced increase in electricity tariff. 

Considering the fact that the aforementioned factors are still very much around and will be key in determining the inflation figures for June, inflation rate is likely to continue on an uptrend in June 2016

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