July’s CPI at 17.1% - Feeds on Structural Challenges


Thursday, September 01, 2016 5:30pm /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 July 2016 has risen to 17.1% year-on-year and remained in the double digit band for the sixth month in a row. The headline inflation index released on August 31, 2016 shows a rise from 16.5% in June to 17.1% in July, representing a 60 basis points rise.

Unfortunately, the last time we had inflation figure as high as current figure was about eleven years ago, dating back to November 2005.

We observed that July’s CPI was strongly impacted by sustained increases in prices of goods and services amidst high cost of petroleum products, protracted foreign exchange challenges, increase in energy bills and lukewarm economic policy direction of the present government.

Amongst the CPI categories, the Food sub-index rose by over 50 basis points to 15.8% year-on-year, higher than 15.3% reported in June. The last time we saw this index this high was in June 2009 at 17.5%. The increase here was triggered by higher import food bills and draw-down on food inventories across the country. The most affected food items were; milk, cheese and oils and fats, fruits, fishes, tubers while prices moderated for vegetables, honey, sugar, chocolates and confectionary groups.

For the sixth month in a row, the Core sub-index (i.e. All Items less Farm Produce) sustained a steep increase. It jumped to 16.9% year-on-year, representing 70 basis points higher than June’s 16.2%.

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 sixth consecutive month. The Urban index rose to 18.9% year-on-year, representing 80 basis points higher than 18.1% recorded in June.

Similarly, the rural index rose to 15.5% year-on-year, representing 40 basis points higher over 15.1% recorded in June. The significant upsurge in both indices could be attributed to the causative agents identified in the Food and Core index categories above.

…Our take
The current price level did not come as a surprises to us. Recall that in our June CPI report, we predicted that July’s inflation would range between 17.0%-17.2%, having taken into account the existing FX challenges, high energy and power cost. The current NBS report confirms our assumptions.

Unfortunately, the inflation figures came at the same time the Q2 2016 GDP and Unemployment data were made available, thereby, sending chills down spines of Nigerians. The Q2 GDP contracted by -2.06%, officially throwing us into full swing recession.

According to the Manufacturing Association of Nigeria (MAN), about 50 manufacturing Companies have wound-up in recent months as a result of inability to break-even as the challenges of high inflation and unfriendly operating environment took its toll on them. Worst still, are the unreported number of Companies in the informal sector (SMEs) which would have closed shops as result of the rising cost of operation.

How do we solve this present quagmire? At this point, we observed that the CBN cardinal objective of allowing the free float of the Naira at the FX market in order to instigate foreign portfolio investment (FPIs) has not been achieved, though, still requires time, effort should be channeled into alleviating structural challenges in the economy.

We should build on our productive base. The present system whereby we produce raw materials, sell them to foreign countries at low market prices and buy their finished products at exorbitant prices, thereby, mounting pressures on the Naira should be stopped. We must strive to reverse this.

Expectation from the CBN: At the next MPC meeting, towards the end of September, we expect the monetary policy watchdog to be decisive. They should be bold to tweak the MPR in order to boost productivity. The fiscal authority must put their recent words into actions in order to build on the country’s weak infrastructure.

Outlook for September 2016
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. As such, we are projecting September CPI to range between 17.1% - 17.3%.

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