With Inflation at 17.1 %, Analysts Highlight Implication for the Economy


Kunle Aderinokun

For the sixth consecutive time this year, the consumer price index (CPI), which measures inflation, rose hitting 17.1 per cent (year-on-year) in July, representing 0.6 per cent or 60 basis points increase over the 16.5 per cent recorded in June. CPI, the headline index, has maintained an upward streak since the beginning of this year as it rose by 0.9 per cent to 11-year high of 16.6 per cent in June compared to 15.58 per cent in May.

The National Bureau of Statistics (NBS), which reeled out the figures recently, noted that “increases were recorded in all Classification of Individual Consumption by Purpose (COICOP) divisions which contribute to the Headline index reflecting higher prices across the economy.”

The bureau explained that the pace of the increase in the headline index was however weighed upon by a slower increase in three divisions; health, transport, and recreation & culture divisions.

The estimation by economic analysts that inflation might have been tamed seems to have been confirmed by NBS with its latest figures. Analysts had predicted that the pace of inflation increase would be slower in July than the previous months. The figures, however surpassed the expectations of analysts.

Ahead of the release of the July inflation data, analysts had predicted a rise in CPI of around 70 basis points. By the analysts’ estimation, the pace of increase in the CPI would, however, be reduced, compared to the 90 basis points it recorded when it hit 16.48 per cent in June from the preceding month’s 15.58 per cent.

The analysts that released their forecasts, obtained by THISDAY were from FSDH Merchant Bank, Access Bank Plc and Dunn Loren Merrifield Asset Management Ltd.

However, economic analysts and market watchers, who expressed their views on this month’s inflation data, acknowledged the slower pace of increase and pointed out the implications for the economy.

In her assessment, Managing Director and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, noted that there would be pressure on prices largely driven by FX shortages, even though “there is little evidence of the ability of businesses to pass on price increases.”

Nonetheless, Khan pointed out that, “we expect a further 200 bps of tightening at the next MPC meeting. According to her, “With inflation already accelerating, policy in real terms will remain accommodative, even with this tightening in place. With a wider current account deficit it remains important for Nigeria to maintain a credible policy response, in order to attract much-needed stabilising inflows.”

Also, analysts at Dexter Analytics, who acknowledged inflation is finally showing signs of slowdown, highlighted the implications of the headline index on the economy.

On Investments, they stated: “Our views remain unchanged from the inflation reports released previously. We believe attractive yields on fixed income securities, which currently trades above 17 per cent, continues to be attractive and will deter investments in equities, especially by low risk investors.

“Nigerian equities continues to endure a volatile run, based on a mix of worsening economic backdrop such as the unfriendly foreign exchange regime that has made the segment undesirable by foreign investors and weak earnings performance of underlying stocks. Indeed as the Q2 2016 GDP which was reported by the NBS at -2.06 per cent confirm the economy to be in a recession, we believe sentiments continue to favour the bears.

“Though we expect mild reaction in equities as the market had largely priced in a possible recession in Q2. We reiterate that only the return of foreign investors in equities, would provide a reprieve. A major concern however is that FPIs to equities continue to flow in trickles, as against the amount needed to spur a speedy recovery.”

Regarding monetary policy direction, the analysts added that, “as the Monetary Policy Committee (MPC) of the CBN sits between 19th-20th September, 2016, we believe the uptick in inflation will continue to be a cause of concern, more so the deep plunge in Q2 GDP to -2.06 per cent. Again, the choice between tweaking interest rates to speed-up a recovery in growth or to tame inflation presents itself. We expect the CBN to maintain rates at the current level of 14 per cent to show consistency and to reap the objectives motivating the hike at the last meeting of the MPC. The fact that currency controls and the severe shortage of foreign currency led the economy down this road is undoubted.

“While we note that the economic recession throws a few spanner in the works and calls for a firm monetary policy response, we believe the current stance, which gives the economy a better chance at Foreign Portfolio Investment (PFIs) inflows gives a better shot at a short term recovery.”

As for the outlook of inflation, the Dexter Analytics analysts posited: “Though gradual, inflation is finally slowing down. As the harvest season beckons, we are likely to see a slower pace of increase in the headline index in the coming months.

“We however note that energy prices and a fast depreciating exchange rate in the official and parallel market remain downsides. For a particular case in point, some prices, such as that of petrol which is partly anchored on exchange rate of N282/$ remain points of pressure. It is not unlikely for us to see an upward adjustment which would stoke increases in the energy and transportation divisions.”

Similarly, analysts at Eczellon Capital Ltd said they noticed the gradual reduction in month-on-month inflation numbers for the second consecutive month.

According to them, “The pace of increase in general price level tapered to 1.25 per cent (month-on-month) in July from 1.71 per cent in June due to waning effect of energy prices and transportation cost.”

The analysts therefore expected “this trend to continue in the coming months as food prices moderate across the country albeit imported inflation is likely to remain high due to continue fall in the value of the naira.”