Finally Naira Devaluation Impacts Price Level, Inflation expected at 8.64%


Wednesday, May 13, 2015 2.14 AM / FDC

After an extended period of price stability and consumer resistance, Nigerian inflation is now yielding to the impact of two bouts of naira devaluation. The first in October 2014 and the other in February this year.

FDC forecasts that inflation for the month of April will increase by 0.14% to 8.64%, when the National Bureau of Statistics (NBS) announces its data on Thursday, May 14, 2015. If this forecast becomes a reality, then it will be the 5th consecutive spike in the price level since December 2014.

The inflation rate will come ahead of the next Monetary Policy Committee (MPC) meeting, the last under the Jonathan administration. The MPC will be concerned, amongst other things, about the impact of the trend of increasing inflation at a time of fuel scarcity, forex market uncertainty and a backlog of unpaid salaries by State Governments. The MPC will be striving for monetary stability and how to ensure that the true value of the Naira emerges from the IFEM and is also sustainable.

Nigerian inflation has tended to be more in the non-food items rather than the food basket. Imported inflation has been muted because of a general decline in global commodities including major imports in Nigeria. Nigeria imports significant amounts of wheat, rice, sugar and dairy products.

The Bloomberg commodity index in 2015 is down 13.5% so far, with wheat prices declining by 18%. This means that the price of flour or bread could increase by 6% after deducting the price decline of 18% from the devaluation of 26%. The price of wheat flour is still N6300 per 25kg bag.

Furthermore, money supply surpassed its benchmark of 15.24% after it increased sharply to 15.69%m-o-m in March from –1.5% in the previous month. The time lag between money supply (M2) growth and its impact on prices ranges between 30-90days. M2 growth in the last 2 years has been well below the CBN target of 15.52% in 2014.

Global & Regional Inflation Picks Up in March/April

Global and regional inflationary trends increased at a more rapid rate between March and April. This is attributable mainly to the appreciation of the dollar against major currencies. Euro zone inflation remain weaker than expected at 0% in April while there was an increase in China (1.5% from 1.4%), Japan (2.3%from 2.2%), Brazil (8.17% from 8.13%).

Consumer prices moderated in Russia (16.4% from 16.9%) and India (4.87% from 5.25%). Inflation rates in five major Sub-Saharan African (SSA) countries (South Africa, Ghana, Kenya, Ivory Coast and Angola) averaged 7.52% due to increased food prices, transportation and weaker currencies. This may force the regions central banks to tighten monetary policy. The most notable rise was in Kenya, Angola and Ivory Coast.

Urban Prices also up in April

Our Lagos urban inflation index increased to 11.31% in April, 1.05% from 10.26% in March. The y-o-y food and non-food indexes increased to 8.73% and 12.61% in April from 8.68% and 11.06% in March respectively. The prices of tomatoes, yams, salt, rice, apparels (men and women), paints and rent were noted to have influenced the increase in the general price level.

The increase is in line with the projected increase in headline inflation rate which is attributed to the pass-through effect of the currency devaluation in February 2015. However, the full effect of this has been blunted by the decline in global commodity prices.

What to Expect in May

Inflation in May is likely to be more pronounced than in April. This is because of the fuel scarcity, unreliable power supply and the increased cost of transportation.

Likely Market Response

Interest Rates

Interest rates are more likely to be sensitive to the outcome of the MPC meeting rather than an increase in the rate of inflation. The MPC has maintained the status quo at the last two meetings. The committee has not made any changes to its policy rate when an increased inflation number is announced close to the MPC meeting in the last year.

Exchange Rates

Exchange rates have been inflation neutral and are unlikely to change. However, the announcement of the inflation numbers is not likely to have any impact on exchange rate. Therefore, investors will await the outcome of the MPC meeting and its impact on the naira before taking positions.

Stock Market

The projected higher inflation rate is unlikely to have any significant impact on the stock market performance. The stock market has been dependent more on the sentiment of weak corporate earnings than interest rates and inflation. Therefore, stock market investors will be looking out for the next set of earnings before changing their sentiment.


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