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Inflation Rate May Rise to Highest Level Since January 2019 - FSDH

Nigeria Economy	3464 VIEWS
Nigeria Economy
3464 VIEWS

Friday June 07, 2019 / 04:48 PM / FSDH Research

If FSDH Research's May 2019 inflation rate forecast comes true, Nigeria may record the highest inflation rate figure since January 2019. That would not be good news for the economy or the purchasing power of Nigerians. Most people say they would not appreciate a situation where the prices of consumer goods increase faster than the expected increase in the approved National Minimum Wage. We expect the May inflation rate to further increase marginally to 11.39% from 11.37% recorded in April 2019. In addition, we expect the month-on-month change in the Consumer Price Index (CPI) to increase by 1.10% in May 2019, the highest since January 2019. With the onset of the rainy season, we have observed upward pressure on the food component of the inflation basket.

The major driver of the expected increase in the inflation rate is the increase in food prices, due to the seasonality effect typically associated with the onset of the planting season. Security challenges in some food producing regions in Nigeria reduce the supply of food items, leading to an increase in prices. The current inflation rate is higher than the 6% - 9% target set by the Central Bank of Nigeria (CBN). Given current realities, the inflation rate will remain above the CBN's target in the short-to-medium-term. This may reduce the real yield on xed income securities.

The price monitor that FSDH Research conducted on certain food and non-food items in May 2019 shows that most prices increased in May compared with April. A cursory look at the movement in prices at the international market and its likely impact on prices in the local market demonstrate an increase in imported inflation (i.e. prices of goods using imports as raw materials). The Food Price Index that the Food and Agriculture Organization (FAO) of the United Nations published for the month of June 2019, shows that the prices of some food items increased. The prices of milk, butter, cheese, maize and meat increased on the international market while prices of oils, wheat and sugar declined. Most of the increases recorded on the international market were mainly as a result of limited export availabilities and improved global import demand.

Meanwhile, the value of the Naira at end-May was N360.43/US$ compared with end-April N360.40/US$ indicating a marginal loss of 3kobo in the value of the Naira. The depreciation in the Naira coupled with the rise in the prices of food items on the international market mean an increase in the local price of imported food items.

We consider the CBN may pursue economic growth at the expense of the inflation rate in the short-term. It may however, adjust its monetary policy tools such as Open Market Operations (OMOs) to reduce excessive supply of cash in the system. FSDH Research notes that one of the ways to reduce Nigeria's inflation rate in a sustainable manner is to improve the infrastructure in the country. Good transport network, good storage facilities, measures to increase farm yields, provision of securities and strategies to ensure linkage between the farmers and the industrial sector will increase the supply of food items, increase profit margin and lower the inflation rate.

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