August CPI at 17.6% - MPC between the devil and the deep blue sea


Monday, September 19, 2016 12:45pm / GTI Research 

Review of NBS Release
Data from the National Bureau of Statistics (NBS) shows that the Consumer Price Index (CPI) or inflation reading for August 2016 has risen to 17.6% year-on-year and remained in the double digit band for the seventh month in a row.

The headline inflation index released on September 16, 2016 shows a rise from 17.1% in July to 17.6% in September, representing a 50 basis points rise. The last time we had inflation figure as high as current figure was about eleven years ago, dating back to November 2005.

The August’s CPI was largely impacted by increase in prices of housing, water & electricity, petroleum products, education and transportation services.

Amongst the CPI categories, the Food sub-index rose by over 60 basis points to 16.4% year-on-year, higher than 15.8% reported in July. The last time we saw the index this high was in February 2009 at 20.04%.

The increase here was triggered by higher import food bills (0.20% growth) and draw-down on food inventories across the country. The highest price increases were recorded on; meat, fruits, fishes, yam & tubers, dairies as well as oils & fats.

For the seventh month in a row, the Core sub-index (i.e. All Items less Farm Produce) sustained a steep increase. It jumped to 17.2% (year-on-year), representing 30 basis points higher than July’s 16.9%.

The increase here was heavily triggered by lingering structural challenges around power and energy, resulting in higher bills in electricity, solid fuels, liquid fuels (PMS, kerosene & diesel) and lubricants for transport and machines.

Also, FX challenges led to higher cost of imported items such as electronic gadgets, books & stationaries, furniture & fittings, machines and vehicle spare parts.

Both the Urban and Rural indices (localized price levels) recorded marked increases for the seventh consecutive month. The Urban index rose to 19.3% (year-on-year), representing 40 basis points higher than 18.9% recorded in July.

Similarly, the rural index rose to 16.1% (year-on-year0, representing 60 basis points higher over 15.9% recorded in July. The significant upsurge in both indices could be attributed to the causative agents identified in the Food and Core index categories above.

On a month-on-month basis, the Headline index rose by 1.0 percent in August, marginally lower than the 1.3 percent recorded in July.

…Our take
The current price level did not come as a surprise to us. Recall that in our July CPI report, we predicted that August’s inflation would range between 17.1%-17.3%, having taken into account the existing FX challenges, high energy and power cost.

The current NBS report, though, 20 basis points higher than our estimate but totally accommodated our assumptions. It is no longer news that we are currently dealing with the most disturbing economic challenges in the recent history of Nigeria- galloping inflation (17.6% in August), declining output (-2.06% in Q2 2016)and unemployment rate (13.1% in Q2 2016) amidst FX challenges. The effect is well articulated in a recent article by the Manufacturing Association of Nigeria (MAN).

According to MAN about 272 Companies have wound-up in recent months as a result of inability to break-even as the challenges of above indicators and unfriendly business environment took toll on them.

From this number, 50 were well structured manufacturing firms while the remaining 222 were SMEs. Given this statistics, the number of people who were formerly employed by these companies that would have been thrown into unemployment cycle would be shocking.

Expectation from the CBN
The CBN will be having its’ MPC meeting next week, on Monday 19th and Tuesday 20th. We recognize that the MPC is between the devil and the deep blue sea (the dilemma of dealing with creeping prices by upping interest rate again or lowering rate in order to stimulate productivity).

In the light of current economic challenges, we recognize the need for the policy makers to stimulate foreign inflows in order to halt or possibly reverse the depreciation of the naira, which is the main driver of the inflationary spike.

Nonetheless, we consider a further hike in rate by the Committee, less desirable due to the potential short-term drag on growth and the possibility of a lengthening of the recession.

Therefore, we are of the opinion that the policy makers should maintain status quo. We based our view on the fact that the economy is in recession. In order to boost investment through credit creation, we do not need to increase MPR at this time, neither should it be lowered in order to curtail further inflation pressures.

September Inflation Outlook
Although, we are currently in harvest season, we might likely see inflation spike again in September due extensively to FX challenges, high cost of energy and power. We project inflation for September at 17.8%.

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