As coronavirus vaccination and bolder steps at reopening economies gains momentum, concerns around the build-up of inflationary pressure (following the sharp decline witnessed in the wake of the pandemic) above acceptable thresholds have headlined monetary policy discuss.
However, top of mind for monetary authorities seem to be the need to keep monetary policy supportive of economic growth till pre-pandemic levels of output are achieved.
In the United States, consumer prices were higher by 3.6%YoY in April (vs. 2.4%YoY in March and 1.6%YoY in February) mainly on account of a low base from last year and higher energy prices. While the FOMC (Federal Open Market Committee) classes these factors as transitory, the Committee also recognized the speedy rate of economic growth (+6.4%YoY in Q1:2021), which it described as “rapid progress towards the Committee’s goals”. Like in the US, price levels in the Eurozone have also maintained an uptrend; climbing from 1.3%YoY in March to 1.6%YoY in April 2021.
Eurostat estimates inflation would come in at 2.0%YoY in May 2021, driven mainly by much higher energy prices. We note that in May, Brent crude oil price averaged c. USD68pb (vs. USD65pb in April and March respectively).
For oil prices, the elephant in the room is the ongoing negotiation between the US and Iran, and the likely return of Iran’s supply to the oil market.
On another hand, global food prices have also continued to trend higher. Food inflation as shown by FAO (Food and Agriculture Organization of the United Nations) food price index was at 39.7%YoY in May 2021 – its highest since September 2011.
The increase in May was due majorly to a sharp rise in the prices of oils, sugar, cereals, meat and dairy.
Nigeria: Base Effect to Relieve Headline Inflation
In April 2021, the first instance of disinflation in 20 months was recorded. Although our prognosis is that risk to consumer prices remain tilted to the upside, on a year-on-year basis, we expect a moderation in headline inflation due to the relatively high CPI
reading in May 2020.
Nonetheless, the persisting insecurity plaguing the Nation’s food belt and the extant challenges associated with sourcing FX supports our notion of a month-on-month increase.
Based on our perception of market prices, we expect food items like vegetables, fruits, yams, fish, and beverages to remain the key drivers of food inflation. Also, we fully expect festivity driven demand during the Ramadan celebrations to add another layer of pressure
Overall, we expect headline inflation at 18.05%YoY in May 2021.