Disinflation settling nicely
● Analysts see a slight decline in June as base effect kicks in; ● Various markets to react from fall in the headline index
DISINFLATION STILL REARED its head in the scheme of things for the second successive month after over 36 months of continued rise in the headline numbers to a 4-year high of 18.17 percent in March 2021, was...
DISINFLA TION STILL REARED its head in the scheme of things for the second successive month after over 36 months of continued rise in the headline numbers to a 4-year high of 18.17 percent in March 2021, was halted in April with a dip to 18.12 percent; and now a further drop to 17.93 percent year on year in May, a 19 basis points movement lower than the prior month’s number.
The fall was slightly below analysts’ expectations, but they have projected a steeper disinflation next time as the impact from the high-base effect from the second half of 2020 will become magnified in the coming months.
According to economic analysts at United Capital Research, “Looking ahead, we think the impact of the high base effect from the second half of 2020 will become magnified in subsequent months, thus we anticipate steeper disinflation. That said, key risks to our expectation remain the possible upward review of electricity tariff and removal of fuel subsidy, which would see fuel pump price rise. Lastly, the increasing rate of disinflation weakens the case for policy tightening at the remaining MPC meetings for the year.”
FBNQuest Research analysts are of the view that the headline rate will witness a slight reduction to allow the monetary policy authority to evaluate the impact of the measures already in place as post-economic recovery is still fragile.
“This was below our expectation of 18.30 per cent. At the last monetary policy committee (MPC) meeting in May, the committee unanimously retained all parameters even though inflation remained very high. It preferred to evaluate the impact of the measures already in place and not tighten as the post-COVID economic recovery was still fragile and because higher rates would undermine the CBN’s plan to make low-cost credit available. Price stability in the short to medium term remained the committee’s core objective.
“However, it noted that supply-side factors have become the main drivers of inflation and cannot be influenced by monetary policy. Due to base effects, our call is for a slight reduction in the headline rate in June to 17.89 percent year on year. All other factors being equal, we would not expect any dramatic policy changes from the authorities at the July meeting,” they said in a note made available to Business A.M.
“We expect inflation to likely rise to 18.2 percent in May on lingering FX restrictions, planting season coming into full effect and the rate of insecurity across the country,” analysts at the Financial Derivatives Company (FDC) had asserted.
For research analysts at Greenwich Merchant Bank, “In the recently released inflation report by the National Bureau of Statistics (NBS), May’s inflation rate printed at 17.93 percent yearon-year from 18.12 year on year in April, similar to our forecast of 17.98 percent as a high base from the prior year slowed changes in consumer prices for the second straight month.
“In our view, the increase in the monthly food inflation reveals that legacy issues and structural challenges are still prevalent in the economy, and the slowdown in the food basket on an annual basis is due to a high base effect. We recall that panic-buying and supply-side constraints accompanied the implementation of lockdowns across the country around the same period last year,” they noted.
The recent inflation report published by the National Bureau of Statistics (NBS) showed that there were rises in all the 12 classifications of individual consumption by purpose (COICOP) functions and all item levels yielding the headline index. In the view of analysts, the positive surprise in inflation was clearly driven by the impact of the high base for CPI from May 2020, as the price environment remains acutely elevated.
Food prices remain elevated as pre-existing supply chain disruptions persist, causing lingering food supply shortages across several regions in Nigeria. Thus, the recent moderation in food inflation is broadly driven by a high base for the food subindex. As seen from the analysis of the data from NBS, the food index, which is a major driver of the headline index retreated 44 basis points to 22.28 percent in May from 22.72 percent in the previous month resulting from increases in prices of bread, cereals, milk, cheese, eggs, fish, soft drinks, coffee, tea and cocoa, fruits, meat, oils and fats and vegetables. Although, the average annual rate of change of the food sub-index for the twelvemonth ending May 2021 over the previous twelve-month average was 19.18 percent, 0.60 percentage points lower from the average annual rate of change recorded in April 2021 at 18.58 per cent.
Conversely, Nigeria’s imported food price inflation climbed to 16.97 percent year on year in May 2021 from 16.91 percent in April despite the second successive dip in the rate of headline inflation to 17.93 percent year on year in May 2021 from 18.12 percent. Though relatively stable, amidst the exchange rate adjustments and the challenges encountered in securing unhindered access to foreign exchange, the major driver of the headline figure has remained the food index. Nevertheless, the surge in the imported food price inflation, the NAFEX turnover amounted to $2.5 billion in May, according to FMDQ, as the inflow was $1.04 billion with the CBN accounting for 42 percent while the nonbank corporates accounted for 22 per cent.
Furthermore, the impact of the COVID-19 pandemic, the FGN’s response to it and fluctuations in the crude price remain visible. Thus, the uptrend increases in core inflation (which excludes the prices of volatile agricultural produce produced during the review month and climbing to 13.15 percent in May 2021 by 0.41 percent compared with 12.74 percent recorded in April 2021) were recorded on price pressure from pharmaceutical products, garments, shoes and other footwear, hairdressing salons and personal grooming establishments, furniture and furnishing, carpet and other floor covering, motor cars, hospital services, fuels and lubricants for personal transport equipment, cleaning, repair and hire of clothing, other services in respect of personal transport equipment, gas, household textile and non-durable household goods, among others.
Analysts expect markets to react
Following the adoption of the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate by the Central Bank of Nigeria (CBN) in late May, which caused the Naira to weaken at the parallel market to a year-low of N505 to the dollar, analysts forecast a headline inflation rate of 1.11 percent month on month, and a 17.81 percent year on year rise in the index in June.
Elsewhere, the domestic equities market recorded an underwhelming outing in May, as profit-taking across tickers dragged the year-todate loss from -1.08 percent at the end of April to -4.55 percent. Experts expect to see some moderation in June on the premise that bargain hunters should key into fundamentally sound stocks trading at attractive prices. More so, it is anticipated that investors will likely take long positions, especially on some high-dividend counters in the banking space, ahead of the half-year earnings season.
Finally, in the month of May, yields in the bond and NT-bills space averaged 12.35 percent and 5.41 percent apiece compared to 11.12 percent and 4.46 percent in the preceding month, due to an expectation of a higher yield environment amid a tight system liquidity crunch. Also, at the most recent Primary Market Auction (PMA), the 91-DTM and 182-DTM sold for 2.50 percent and 3.50 percent, unchanged from the prior auction, while the stop rate on the 364-DTM tapered to 9.64 percent from 9.75 percent. Market analysts expect that participants in the bonds space will trade cautiously ahead of the June Primary Market Auction (PMA) which should provide clarity on the direction of the market.
Although the increasing rate of disinflation weakens the case for policy tightening at the remaining MPC meetings for the year, a number of economic analysts have hinted that a continued moderation in overall inflation because of the base effect, which would be masking the persisting challenges of food production and supply owing to banditry, ongoing planting season, and transportationrelated issues, should be expected in June and going into the close of the first half of 2021.