Inflation Projected to Decline in February

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By Obinna Chima

Analysts have predicted that the Consumer Price Index (CPI) for February 2017, expected to be released this week, would decline for the first time in about 16 months.
Headline inflation spiked to 18.72 per cent in January as a result of an unexpected jump in food inflation and the impact of record high diesel price at N275 per litre. In January, the core and monthly indexes declined contrary to the direction of headline inflation.
The National Bureau of Statistics (NBS) is scheduled to release the inflation figure for February 2017 on Wednesday, based on the data release calendar on the bureau’s website.

To this end, the Economic Intelligence Group of Access Bank Plc anticipated that inflation rate (year-on-year) would moderate downwards to 18.1 per cent in February 2017, from the 18.7 per cent posted in January 2017.  As usual, the bank’s analysts said in their methodology, they adopted an autoregressive analysis of past prices, while they recognised all the assumptions used by the NBS in its computation of monthly composite consumer price index (CCPI).
“We forecast inflation rate (year-on-year) to decline to 18.1 per cent from 18.7 per cent reached in January 2017. The expected dip in the year-on-year inflation reading will be largely driven by base effects. Base effects refer to the influence of the consumer price changes of the corresponding month of the previous year on the changes in the annual inflation of the current year’s respective month.
“From our investigation, there was an increase of 3.8 points in the consumer price index (CPI) to 219.5 points in February 2017 from January, a slower increase compared to the rise in the corresponding period of 2016 when the CPI rose by 4.19 points to 185.89 points in February 2016 from the January 2016 number.

“Largely, the slow rate of change forecasted for February 2017 is due to the higher CPI base witnessed in 2016. Recall, there was an FX depreciation of about 11.7% at the unofficial market in February 2016. The pass-through effect of this depreciation impacted market prices and consequently CPI,” they predicted.
Further, a report by the Access Bank team noted that the base effect-led decline in inflation rate was expected to mask the moderate price increases of goods and services during the review period. They noted that the core-sub index which had declined for two consecutive months was also expected to continue on its downward trajectory as prices under groups such as communication, restaurants and hotels are expected to remain muted or ease marginally.
Also, analysts at the Financial Derivatives Company Limited predicted that headline inflation for February would decline. Their own forecast was based on a regression model and empirical analysis.
“Most anecdotal proxies also seem to suggest that the trend of a slowing pace in inflation is consistent with the outcome of our regression. The fundamental reason for this decline is the impact of significant developments in February 2016 (base year effects).
“In February 2016, distortions in the forex market led to a significant jump in CPI, beginning a trend that lasted for several months. February 2017 has been relatively stable compared to last year; hence we expect a moderation in the increase in CPI from 4.18 in 2016 to 2.0 in 2017.

“This means that a new trend of declining inflation is on the horizon. This new trend is observed amongst a number of Nigeria’s sub-Saharan African peers like Angola and Malawi. It is noteworthy that the anticipated decline in the February numbers does not mean that prices will decline,” the FDC added.
The Central Bank of Nigeria announced far-reaching changes in the forex market with weekly disbursements of $1 million to banks at a price of not more than 20 per cent mark up of the interbank forex rate. The CBN also sold a significant amount of dollars in the forwards market. The actions of the CBN saw the naira appreciate by 15 per cent in the first seven days. This fueled hopes that the pressure on consumer prices from forex policy inconsistency and market scarcity was on its way to a decline.