Inflation will cross the 12% threshold; pace of increase to slow significantly

Inflation will cross the 12% threshold; pace of increase to slow significantly

Must Read

List of Guaranty Trust Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...

Top 10 Most Expensive Universities In Nigeria

For many Nigerians, high-quality higher education is a luxury. There are many private universities who are known not only...

List of Access Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...
- Advertisement -
- Advertisement -

Our market survey in January reveals that headline inflation is likely to inch up to 12.05% from 11.98% in December  2019.  If this forecast is accurate,  it will mean that inflation has increased for five consecutive months. This will be a major concern for policymakers. The MPC, at its last meeting, emphasized the determination of the  CBN  to rein in inflation because of its negative impact on  GDP  growth and unemployment. We also expect food and core inflation to move in tandem with the headline inflation, rising to rise to 14.7% and 9.4% respectively.

The good news though is that the incremental change in the price level is now down to a mere 0.07% from 0.36% in October 2019. This is primarily because the base year effects of the border closure are losing steam and consumers’ purchasing power is squeezed. The impact of the  CBN’s unorthodox policies has been a sharp decline in interest income, which has resulted in a reduction in aggregate consumption. The minimum wage impact has also been benign as Federal workers account for an insignificant proportion of the national workforce and some of the states are yet to commence payment.  However,  money supply growth and higher logistics costs continue to stoke inflationary pressures.

A further decomposition of the inflation survey shows a decline in the month-on-month inflation (which is more reflective of current prices) to 0.81% (annualized 10.20%). This confirms the notion that inflation may be approaching a point of tapering. This may indicate that recent policy measures are beginning to bear fruit and inflation expectations will get muted in the near term.

Read:  HEADLINE INFLATION TO DIP AGAIN TO 15.88% IN NOVEMBER

What factors are putting pressure on inflation?

Liquidity Surfeit

An increase in the money supply causes inflation to rise as more money chases the same quantity of goods. In November 2019, the money supply increased by 4.99% (5.44% annualized) to N28.42 trillion. This can be largely attributed to the CBN’s heterodox policies in a bid to boost lending to the real sector. Credit to the private sector grew by 16.3% to N26.41trillion in November.

Read:  Central Bank of Nigeria injects $210m in Forex market

Lower output

Anecdotal and empirical evidence showed that economic activities slowed in January due to the post-Christmas effect and the delay in the commencement of business operations.  The  8.06%  decline in  FBN’s purchasing managers index to 53.6  points in January from 58.3  points in  December gives credence to the notion that January is typically a seasonally slow month.

Higher diesel prices

Diesel is the fuel that powers most distribution trucks and generators.  A  recent spike in the price of the product by 2.33% means that logistics costs will increase and further stoke inflationary pressures.

Inflationary pressures increased across SSA – 4 Reds, 3 Green

The food price inflation trend continues to determine the direction of inflation across sub-Saharan Africa (SSA). Three out of the six SSA countries under our review have released their January inflation numbers. While Kenya and Uganda recorded lower inflation rates, Zambia posted an increase.

Read:  Images at the ongoing construction of Second Niger Bridge at Asaba, Delta State

In a surprise move, Kenya and South Africa cut their benchmark interest rates by 25bps at their respective meetings in  January.  Kenya attributed its rate cut to well-anchored inflation and dwindling inflation expectations while South Africa cited persistent economic vulnerability.

Inflation outlook in February

At the last MPC meeting, the committee increased the cash reserve ratio of banks by 500 basis points to 27.5% to curtail inflationary pressures in the economy. The mopping up of an additional N1.4trillion of total banking assets is expected to taper inflationary pressures. However, there are other inflation threatening factors which include:

  • VAT hike: The increase in VAT to 7.5% from 5% effective February 1 is expected to filter through to an increase in commodity prices, thus stoking inflationary pressures.
  • Ban of motorcycles and tricycles: The ban on tricycles and motorcycles in some parts of Lagos state has increased transport costs for some routes and led to increased demand on the available transport options. This will have a negative impact on productivity and ultimately output.
  • Higher logistics and distribution costs:  Higher diesel prices would increase firms’  logistics and distribution costs. Depending on the elasticity of demand for the product, the cost effect could be passed on to customers in the form of higher commodity prices.
  • Supply bottlenecks: The lingering effect of the border closure and forex restrictions will continue to weigh on the general price level.

Financial Derivatives Company Ltd.

- Advertisement -

Subscribe to BrandSpur Ng

Subscribe for latest updates. Signup to best of brands and business news, informed analysis and opinions among others that can propel you, your business or brand to greater heights.

Latest News

Take off to Strategy 2025 goals: DHL Express upgrades its fleet with six new Boeing 777 Freighters this year

First delivery of 2020 batch accomplished, recent 777F touched down at its operational home base Cincinnati last ThursdayDHL continues...

Billionaire Mai Vu Minh welcomed the assistant of Bosnia-Herzegovina President to pay an official visit to Vietnam

The visit is one of the activities of the program "Bilateral investment cooperation between SAPA Thale Group and Bosnia - Herzegovina Government and leading...

OVH Energy Marketing Commits to Reshaping Nigeria’s Fuel Retail Landscape

OVH Energy Marketing, a licensee of the Oando retail brand, has restated its commitment to reshaping the fuel’s retail landscape. The company made this...

HP Nigeria Unveils HP Elite Dragonfly PC (Photos)

HP West Africa has launched the new HP Elite Dragonfly PC as part of its desire to continue driving innovation in the technology space. Speaking...

Islamic Development Bank Issues its Largest Ever Sukuk Worth US$ 2 Billion

The Islamic Development Bank (IsDB) has priced its largest Sukuk issuance ever, raising US$ 2 billion in 5-year Trust Certificates under its US$ 25...
%d bloggers like this: