Significantly Higher Inflation Projected for May

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A Lagos market grapples with low patronage caused by rising prices of food stuffs

Kunle Aderinokun

Analysts at Dunn Loren Merrifield Asset Management Ltd and FSDH Securities Ltd have predicted a significant increase in inflation for the month of May over the position in April. They blame the increasing rate of inflation on higher transport costs due to the increase in the pump price of petroleum motor spirit (PMS) and the effect of the prevalent foreign exchange crisis.

For Dunn Loren Merrifield (DLM) , the consumer price index (CPI), which measures inflation, is expected to shoot up to 14.69 per cent in May from 13.72 per cent of the preceding, month while FSDH put the figures at 15.58 per cent for the same month.

According to the DLM analysts, “The core inflation index captured by the ‘All items less farm produce’ also rose by 13.35 per cent from 12.17 per cent in March 2016. We estimate a significant rise in headline inflation to 14.69 per cent year-on-year in May 2016. This represents an increase of 97 basis points from 13.72 per cent recorded in the preceding month.”

The headline inflation for May 2016 is expected to be released by the National Bureau of Statistics on the 18th of June 2016.

The analysts recalled that the headline inflation rate for April 2016 increased to 13.72 per cent year-on-year from 12.77 per cent recorded in the previous month largely driven by higher food prices and lingering structural constraints with spill over effect seen in electricity rates, kerosene & premium motor spirit prices and imported items amongst others. This, according to them, represents “the third consecutive month of a faster increase in the index and also the highest rate recorded in over seven years. This was attributed to faster increases across all divisions which contribute to the index with the exception of the restaurants and hotels division which increased, albeit at a slower pace for the third consecutive month. “

In the same vein, the FSDH analysts posited: “We also noticed increases in Transport, Housing, Water, Electricity, Gas & Other Fuels divisions between April and May 2016. Our model indicates that the price movements in the consumer goods and services in May 2016 would increase the CCPI to 198.31 points, representing a month-on-month increase of 2.75 per cent. We estimate that the increase in the CCPI in May will produce an inflation rate of 15.58 per cent.”

However, on a month-on-month basis, the DLM analysts stated that, the pace of price increase slowed considerably to 1.60 per cent from 2.20 per cent in March 2016.

“The food index was higher by 13.19 per cent up from the 12.74 per cent recorded in the previous month due to price increases in imported as well as domestically produced foods (driven by tighter food supplies) with the highest price increases seen in fish, bread and cereals, and vegetables groups. Similarly, the core inflation index captured by the “All items less farm produce” also rose by 13.35 per cent from 12.17 per cent in March 2016. We estimate a significant rise in headline inflation to 14.69 per cent year-on-year in May 2016. This represents an increase of 97bps from 13.72 per cent recorded in the preceding month, “ they said.

Also, analysts FSDH noted that, “our model shows a movement in the food and core sub-index to 200.0points and 193.3points respectively in May 2016. This translates into a food and core inflation of approximately 13.44 per cent and 14.24 per cent respectively. This in our view is primarily driven by seasonal adjustments, higher fuel prices, food supply shocks and higher imported inflation. We re-iterate that the underlying drivers of the upward price movements are more structural in nature and as such wouldn’t ease off until these pressure points are addressed. We also note the component of inflation which is induced by exchange rate dynamics. Hence, we believe that clarity on the operation/modalities of the second tier foreign exchange market is crucial to easing some degree of inflationary pressures in the months ahead.”

The FSDH analysts also stated that the Food Price Index (FPI) that the Food and Agriculture Organization (FAO) recently released showed that the FPI increased for the fourth consecutive month. “The Index was up in May by 2.12 per cent compared with the revised value in April as all the sub-indices increased except the vegetable oils. The FAO Sugar Price Index recorded a sharp rebound in May, primarily driven by deteriorating crop production prospects in India.

“The FAO Meat Price Index was up 2.05 per cent as prices for all categories of meat were on the increase. The FAO Cereal Price Index was up by 1.65 per cent , largely on account of the sharp increase in the price of maize. The price of rice was also strengthened while wheat prices were more modest. The FAO Dairy Price Index was up by 0.44 per cent, due to sustained international import demand for whole milk powder and butter,” the pointed out.

On the flip side, “ the FAO Vegetable Oil Price Index fell by 1.84 per cent due to less than expected import demand for palm oil, combined with growing export availabilities in Malaysia. Our analysis indicates that the value of the Naira remained stable at the inter-bank market, while it depreciated at the parallel market by 8.63 per cent to close at US$/N351.00 from US$/N320.70 at the end of May. The depreciation recorded at the parallel market between the two months under review further increased the prices of imported consumer good prices in the domestic market. The prices of most of the food items that FSDH Research monitored in May 2016 increased.”