As usual, let us start by appreciating all fathers across Nigeria and the globe. The responsibilities and burden most fathers carry cannot be overlooked as they play a pivotal role in our lives. “One father is more than a hundred schoolmasters,” said George Herbert.
We at Comercio Partners Limited celebrate all our able and responsible fathers out there and wish them a Happy Father’s Day!!! Keep up the good work. Moving along, let us now delve into the topic of the day, which interestingly, I think would be of concern to the fathers.
Inflation – A Statistical Victory
Several millennials have jovially referred to this recent uptrend in inflation as the type you can taste. The value of money has been eroded and real income depleted.
Food inflation, which accounts for the largest quotient of the consumer expenditure in Nigeria, has been the major driver of the overall price increase; hence, causing a lasting pain on a population with roughly 40% (2019) seated below the international poverty line as defined by the World Bank.
Think about this again, 40% of Nigerians could not afford the food that has now become more expensive.
For 19 consecutive months, the year-on-year inflation rate for both the headline and food index rose consistently but moderated in April and May 2021. The recently released inflation report for May, had a headline inflation print at 17.93% YoY in May 2021, 0.19% lower than 18.12% recorded in April 2021, while the food segment moderated to 22.28% YoY in May 2021, 0.44% lower than 22.72% recorded in April 2021.
For the policymakers, this is great. Inflation is moderating as they earlier predicted. However, things are just as bad for the average Nigerian as the improvement seen in inflation has the statistical technique used for its calculation to thank.
The YoY inflation rate for May 2021 is simply a comparison of the consumer price index of the period to that of the corresponding period in 2020. Accordingly, if prices were significantly high in the base period, we should see some moderation in the reference period, and this was the case in May 2021.
That is technically referred to as the base effect, and it only offers a mathematical victory, leaving the real problems unsolved. The monthly inflation rate exposed the true nature of the problem, as both the food and headline index rose in May 2021. For the core segment, everything is just as bad as we saw both the yearly and monthly rates inch up, buoyed by the pass-through effect of the depreciating naira.
Nonetheless, asides from the base effect, food inflation should receive support from the green harvest season, which commenced last month, contributing to a sustained downtrend in inflation.
“Love for Food or Lack of Money?”…
The percentage of household spending that goes to food is alarming, as Nigerians spend a whopping 59% on food. It would be funny if the reason were simply because of our unending love for food, but it is much more complex than that. There are three possible reasons why Nigeria’s expenditure pattern is dominated by food spending relative to that of other countries.
One is the low income as captured by the GDP per capita, the second is the fast-rising rate of food inflation, while the last is the mix of both. As you must have guessed, Nigeria is blighted by the hybrid form of the problem. GDP per capita for Nigeria has on a downward trend since 2014, declining by 28% from $3,098 in 2014 to $2,229 in 2019.
GDP per Capital vs Food as a percentage of household expenditure
“Hard guy, Hard guy…. Inflation gets to 5% you shake.”
The US Fed held its FOMC meeting last week, and as expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024.
The Fed also raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection. This begets the question, “will the US Fed react further if inflation continues its upward trend?”
US Inflation 5-Year Trend
Financial markets reacted sharply to the announcement last week as the change in stance contradicts the Fed’s recent claims that the recent spike in inflation is temporary. The Dow Jones Industrial Average turned sharply lower after the Fed’s statement, falling as much as 382 points.
The S&P 500 dipped 0.5% to 4,223.70, while the Nasdaq Composite also dipped 0.2% to 14,039.68. We witnessed a slight recovery towards the end of the week as the central bank did not indicate when it will begin cutting back on its aggressive bond-buying program. The Fed has been purchasing $120 billion worth of bonds each month as the economy continues to recover from the coronavirus pandemic.
S&P 500 CHART WoW
With inflation expected to remain elevated in the near term due to the base effect, we expect market sentiment to remain soft as concerns about a sooner than expected rate hike continues to hover.
