Slight Relief for Economy with Projected Decline in June Inflation


Kunle Aderinokun
Economic Research analysts have projected a slight relief for the economy, forecasting a decline in the consumer price index (CPI), commonly called inflation, for June. The analysts, whose work have just been released and made available to THISDAY are from the Economic Intelligence Group of Access Bank, DLM Asset Management Ltd and Financial Derivatives Company Ltd.

The inflation as at May had risen significantly to 15.58 per cent from 13.7 per cent in April but analysts from Access Bank have forecast a drop in inflation to 15.4 per cent in June from 15.58 per cent while those from DLM and FDC projected a moderation to 15.53 per cent and 15.50 per cent respectively.

According to Access Bank analysts, “The Economic Intelligence Group forecasts inflation rate (year-on-year) to moderate downwards to 15.4 per cent in June 2016 from 15.6 per cent posted in May 2016. Our methodology adopts an autoregressive analysis of past prices, while it recognizes all the assumptions used by the National Bureau of Statistics (NBS) in its computation of monthly composite consumer price index (CCPI).

They explained: “Our expectation for a downtick in inflation rate for the first time in 2016 is based on an anticipated downward movement in the food sub-index and core sub-index.

“The slowdown in the pace of advance in the food sub-index would be driven by decline in the prices of food items such as rice, tomatoes, and vegetable
oil on the back of availability of Premium Motor Spirit (PMS) which may have aided transportation and distribution of these items.

“The core index should also descend marginally due to slight change in consumer behavior witnessed during the review period towards imported goods. Therefore, weak demand for imported items is expected in June as higher prices in the previous month may have caused cutbacks in consumption spending.”

However, the bank’s analysts cautioned that, “Our June inflation expectation of 15.4 per cent still leaves the real rate of return in negative territory.
“Yields in the fixed income market may start to trend downwards as inflation rate begins to descend.

There is almost a one-month lag relationship that exists between inflation and yields. This phenomenon is best seen looking at May’s rise in inflation rate to 15.6 per cent (from 13.7 per cent) and CBN’s primary market auction in June which showed treasury bills’ true yield for 91 day investment increase by over 200 basis points to 10.25 per cent per annum while the true yield for 364 day investment rose by over 400 basis points to 17.63 per cent per annum in the previous auction.
Similarly, a lower inflation in June should lead to a reversal in
yield trend at the next auction in July.

Also in their assessment on the headline inflation, analysts at DLM stated, “We estimate a marginal decline in headline inflation to 15.53 per cent year-on-year in June 2016; down by 5 basis points from 15.58 per cent recorded in the preceding month. This in our view will be primarily driven by slower rises in the food index. Our model also shows a movement in the food and core sub-index to 204.3points and 196.3points respectively in June 2016. This translates into a food and core inflation of approximately 14.71 per cent and 15.06 per cent respectively. Inflationary pressures to subsist in the short term.”

They however added: “Whilst we note the respite expected in June inflation figures, we see the likelihood of upward price movements in the coming months given structural constraints which in our view would not necessarily respond to monetary tightening. In our opinion, the need to stimulate investment and economic growth using fiscal policies cannot be over-emphasized. This would support employment, boost food production and prices will become more stable in the near term.

Furthermore, we are of the view that the successful operation of the InterBank Foreign Exchange Market is crucial to easing some degree of inflationary pressure.”
Similarly, analysts at FDC posited that, “after an almost unstoppable rise in headline inflation to a record high, the economy may be entering an era of disinflation or declining rates of inflation. We are projecting inflation in June to drop from 15.6 per cent to 15.5 per cent. If this estimate turns out to be accurate, it will raise some fundamental questions as to the direction of inflation and possible level of interest rates in the money markets.

According to them, “Headline inflation in Nigeria had almost been a loose cannon, defying most rules of economic gravity and logic. The root cause of the near hyper inflation rate can be traced to supply shocks at-times attributable to artificial scarcity compounded by uncertainty in the forex markets.
The Big question therefore is whether this drop in inflation is a blip or a point of inflection.”