Falling Oil Prices, Bigger Threat to Nigeria’s Inflation

0

Nigeria’s headline inflation sustained its upward trajectory for the sixth consecutive month, with the February CPI hitting 12.20 per cent year on year (y/y) from 12.13 per cent in January. It was the fastest pace of consumer price growth witnessed since April 2018. Experts, however, said the rising inflationary trend could be sustained as continued drop in oil prices, which threatens the ability of the central bank to keep defending the naira might worsen the situation. Bamidele Famoofo reports

Experts have warned that headline inflation in Nigeria in the months ahead might be bigger than what was recorded in February, when the figure rose by 7 basis points (7bps), to 12.20 percent.

The threat which the falling crude oil prices and other commodities pose on the value of the Naira, would be the reason why inflation will skyrocket as CBN may not be able to continue to defend its value in the days ahead, researchers at Cordros Capital argued.

“For the next few months, the recent precipitous decline in crude oil prices, which now questions the CBN’s ability to keep the naira range-bound, poses a fresh upside risk to both the core and food baskets, and by extension, the headline inflation”, Cordros stated.

Though experts said they would expect the apex bank to defend the naira at all cost, they are uncertain if that will be possible in the present economic situation orchestrated by the raving Covid-19 pandemic which has badly hit prices of commodities especially oil in the world market.

“We expect the CBN to explore all available options, including ‘gun-boat’ tactics, to defend the currency. However, we believe that the lack of substantial fiscal buffers and foreign investors continued aversion towards naira assets, will eventually force the CBN to re-price the currency should oil price sustain its downward spiral”, a report published by the firm disclosed.

The report stated further that: “Assuming, the border remains shut through 2020 and the proposed electricity price hike is implemented in April; we expect inflation to hit 15.89per cent in December, and average 13.21per cent over 2020FY. However, currency devaluation is now the key upside risk to our forecast. On our estimates, 10per cent devaluation will move the naira closer to its fair value.”

But the CBN’s monthly Business Expectations Survey (BES) does not agree with the position of Cordros as it said surveyed firms expect the average inflation rate in the next six months and the next twelve months to stand at 11.66 and 11.75 percent, respectively.

Border Closure Impact Wanes

According to Cordros Capital, the impact of border closure on inflation has diminished significantly as the first slower pace of price growth was witnessed in February, seven months after the closure of land borders in Africa’s biggest economy.

“Though in line with our expectations, the magnitude of the price increase was somewhat slower than our initial thoughts. Pointedly, the headline month-on-month number moderated by 8bps, the first slower pace of price growth witnessed since the announcement of the closure of the land border in August 2019. The key takeaway for us is that the initial reaction from border closure-induced price hikes appears to have dissipated. To underscore the preceding, the headline month-on-month print of 0.79per cent was 41bps below the five-year historical average for the month of February, supporting the view that the impact of tighter market supply, occasioned by the border closure, has thinned out.”

Review

Food inflation notched higher to 14.90per cent in the review period, owing to an unfavourable base from the prior year. According to the National Bureau of Statistics (NBS), the highest increases were recorded in the prices of bread and cereals, fish, meat, vegetables, and oils and fats. Compared with the situation in the previous month, food inflation moderated by 12bps to 0.87 percent month on month in February.

Elsewhere, core inflation rose by 9bps to 9.43 percent y/y. The pressure was most significant in the prices of Pharmaceutical products, Non-durable household goods, Catering services, Passenger transport by air, and Repair of furniture. On a month-on-month basis, the core basket moderated by 9bps to 0.73 percent.

The urban inflation rate increased by 12.85 percent (year-on-year) in February 2020 from 12.78 per cent recorded in January 2020, while the rural inflation rate increased by 11.61 per cent in February 2020 from 11.54 percent in January 2020. On a month-on-month basis, the urban index rose by 0.82 percent in February 2020, up by 0.10 from 0.92 percent recorded in January 2020, while the rural index also rose by 0.76 percent in February 2020, down by 0.07 from the rate recorded in January 2020 (0.83) percent. The corresponding twelve-month year-on-year average percentage change for the urban index is 12.03 percent in February 2020. This is higher than 11.92 percent reported in January 2020, while the corresponding rural inflation rate in February 2020 is 11.09 percent compared to 11.04 percent recorded in January 2020. The percentage change in the average composite CPI for the twelve months period ending February 2020 over the average of the CPI for the previous twelve months period was 11.54 percent, showing 0.08 percent point from 11.46 percent recorded in January 2020.

Food Index

The composite food index rose by 14.90 percent in February 2020 compared to 14.85 percent in January 2020. The average annual rate of change of the Food sub-index for the twelve-month period ending February 2020 over the previous twelve-month average was 13.98 percent, 0.12 percent points from the average annual rate of change recorded in January 2020 (13.86) percent. This rise in the food index was caused by increases in prices of Bread and Cereals, Fish, Meat, Vegetables, and Oils and fats. On month-on-month basis, the food sub-index increased by 0.87 percent in February 2020, down by 0.12 percent points from 0.99 percent recorded in January 2020.

All Items Less Farm Produce

The highest increases were recorded in prices of Pharmaceutical products, Non-durable household goods, Catering services, Passenger transport by air, Repair of furniture, Maintenance and repair of personal transport equipment, Water supply, carpet and other floor coverings, Major household appliances, Dental services, Hospital services and Vehicle spare parts.

The ‘’All items less farm produce’’ or Core inflation, which excludes the prices of volatile agricultural produce stood at 9.43 percent in February 2020, up by 0.08 percent when compared with 9.35 percent recorded in January 2020. On month-on-month basis, the core sub-index increased by 0.73 percent in February 2020. This was down by 0.09 percent when compared with 0.82 percent recorded in January 2020. The average 12-month annual rate of change of the index was 9.09 percent for the twelve-month period ending February 2020; this is 0.02 percent points lower than 9.11 percent recorded in January 2020.

Inflation by States

In February 2020, all items inflation on year-on-year basis was highest in Bauchi (14.47per cent), Niger (14.06per cent) and Plateau (13.98per cent), while Borno (10.46per cent), Abuja (9.68per cent) and Kwara (9.59per cent) recorded the slowest rise in headline Year on Year inflation. On month on month basis however, February 2020 all items inflation was highest in Kano (1.59per cent), Benue (1.55per cent) and Taraba (1.53per cent), while Ondo, Ogun, Nasarawa, Kebbi, Bauchi, Anambra all recorded price deflation or negative inflation (general decrease in the general price level or negative inflation rate).

Food Inflation on month-on-month basis however, February 2020 food inflation was highest in Benue (2.38per cent), Osun (2.36per cent) and Rivers (1.77per cent), while Abuja, Anambra, Bauchi, Bayelsa, Katsina, Kebbi, Nasarawa, Ogun and Ondo all recorded price deflation or negative inflation (general decrease in the general price level of food or a negative food inflation rate). In February 2020, food inflation on a year on year basis was highest in Sokoto (17.12per cent), Plateau (16.99per cent) and Gombe (16.96per cent), while Nasarawa (13.50per cent), Bauchi /Katsina (13.04per cent) and Bayelsa (11.89per cent) recorded the slowest rise.