With Steady Decline, Hopes Rekindle for Single-digit Inflation


Kunle Aderinokun

Consistent decline in consumer price index since the beginning of this year may be sign that the index, which gauges inflation, would continue further downward slide and eventually hit single digit. CPI for June, according to data from the National Bureau of Statistics, declined for the five consecutive times this year. The index, which increased by 16.10 percent (year-on-year) in June, was 0.15 percent points lower than the 16.25 percent recorded in May. It dropped 0.99 percent points to hit 16.25 per cent (year-on-year) in May from 17.24 per cent in April.

Analysts believe indications are rife that the downward streak would prevail and cross over to the single digit level in not too distant a time. This notion, however, came with cautious optimism and concern that the rate of decline is reducing, even though the forthcoming harvest season is expected to provide a relief and widen the gap of decline.

According to the CEO, The CFG Advisory Ltd, “The data now confirms that the downward trajectory for inflation is sustained and this is good news for stimulating GDP growth and ensuring positive real rates.”

“The good rains this year and an expected bumper harvest this year, should tame the stubborn rise with food inflation,” he added.
Similarly, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, is optimistic that the CPI would drop significantly and could be as low as 15 per cent in the coming months.

Ademola attributes the decline in headline inflation to a number of reasons, namely, “the stable and in fact moderating exchange rate, the improved productivity level, the commencement of the harvesting season and most importantly, the high base effect.”

“And because the inflation rate is even higher in the second half of 2016, the inflation for the rest of the months in the year is expected to be significantly lower than what we currently have. We could expected to get to as low as 15 per cent in the coming months,” he posits.

Pointing out that, “The lower inflation figures experienced is mostly due to the base effect,” they believed, “it has the potential of encouraging consumption with positive effects on production and economic growth.”

The Director, Union Capital Ltd, Egie Akpata, who says, “The continued decline in inflation is a positive development,” is, however, worried that, “The monthly rate of decline is reducing and CPI does not seem to be falling fast enough to have a material impact on key economic indicators.”

According to him, “The slow rate of decline is likely to continue over the next few months and there is a potential risk that we could have months without any meaningful decline in CPI. The annual and month over month increases in food prices is a cause for worry as this alone can impact future levels of CPI if the trend continues. Unfortunately, this inflation trend is unlikely to motivate the MPC to start reducing rates until inflation is materially lower than the current levels. At this rate, such rate reduction might not happen if at all till very late this year. Significant reduction in inflation would be driven by a good harvest, improved power supply and continued FX supply and stability.”

To the CEO, Global Analytics Consulting, Tope Fasua, the decline was not unexpected.
“The forces of demand and supply ensures a balance. The galloping inflation we witnessed was supply-side driven because of currency devaluation and higher input prices. But there is a limit to the elasticity of many markets. At some point people start to substitute, or avoid buying even essential goods altogether. Then inflation slows down,” he explains.

He adds: “Perhaps we could have had a sharper correction but for food inflation. Recently there has been uproar about Yam exportation, with the local prices of yam more than doubling. Such occurrences are responsible for the continued double-digit inflation as food is a major part of the CPI basket.”

“With the right economic policies, we should be looking at a single digit figure as the economy pulls out of recession early next year. My advice remains that we look seriously at fiscal responsibility and shrink government,” he concludes.