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Business News of Sunday, 21 November 2021


Cautious optimism trails sustained ease in headline inflation

Market Market

As the Yuletide season beckons, it is not a surprise that Nigerian households and businesses are beginning to plan for the end of the year festivities.

However, economic watchers said given the latest inflation figures churned out by the National Bureau of Statistics (NBS), it might turn out to be a difficult season unless practical steps are taken to tackle the prohibitive costs of basic household items.

The October inflation report by NBS showed sustained ease in headline inflation, the seventh consecutive disinflation, to 15.99% in October (from 16.63% recorded in September) and the lowest inflation rate in 2021.

This was chiefly driven by a slower increase in food inflation. Slower inflation rates were also registered in both urban and rural areas at 16.52% (from 17.19%) and 15.48% (from 16.08%) respectively in October; also based on moderation in food inflation.

Against the backdrop of the harvest season coupled with sustained high-base effect, the food index rose at a slower pace, by 18.34% in October (compared to 19.57% recorded in September) as there were weaker y-o-y increases in prices of oils & fats, bread & cereals, fish, coffee, tea & cocoa, tubers, dairy, and egg. Similarly, the core inflation rate eased to 13.27% (from 13.74% in September) on the back of a slower y-o-y rise in prices of clothing & footwear, housing water, electricity, gas & other utilities, as well as furnishings & household equipment maintenance.

Meanwhile, the imported food index rose by 17.24% (as against 17.19% in September) as naira further depreciated against the greenback at the parallel market and the interbank window.

Two months moving average foreign exchange rate at the parallel market rose m-o-m by 4.94% to N562.80/USD in October 2021. On a month-on-month basis, headline inflation declined in October to 0.98% (from 1.15%) amid sustained moderation in prices of food items (food inflation rate fell to 0.91% from 1.26%) even as the core inflation rate moderated to 0.80% (from 1.24%).

Rise in Food Index

According to the bureau, this rise in the food index was caused by increases in prices of food products, coffee, tea and cocoa, milk, cheese and eggs, bread and cereals, vegetables and potatoes, yam, and other tubers.

It added that on a month-on-month basis, the food sub-index increased by 0.91 per cent in October 2021, down by 0.35 per cent points from 1.26 per cent recorded in September 2021.

“The average annual rate of change of the Food sub-index for the 12 months ending October 2021 over the previous twelve-month average was 20.75 per cent, 0.04 per cent points from the average the annual rate of change recorded in September 2021 (20.71) per cent,” it said.

Nigeria’s inflation continues to run contrary to market reality. In the last year, the average price of commodities surged by over 50 per cent due to exchange rate pass-through, supply chain disruptions, money supply saturation, higher energy and logistics costs.

The naira lost 18.4 per cent in the parallel market to trade at N547/$ from N462/$ in October 20.

In their commentary, analysts from Cowrie Assets Management Company believed that the expected harvest season in November may be the change agent needed to bring down foodstuff prices, warning however that the anticipated increases in consumer spending in December may push the inflation rate higher.

“Recently, we have seen naira appreciate against other foreign currencies, especially the greenback hence, easing the foreign exchange volatility the country experienced a couple of months ago.

Also, the increase in food supply on account of the ongoing harvest season would as well ease inflation in November. However, we might see upward pressures in the annual inflation rate in December amid retail price increases associated with consumer spending in the yuletide season.

Between the Data and Market Realities

However, analysts from Financial Derivatives do not seem to agree with the latest inflation figure released by the NBS, insisting that while the sustained moderation in inflation was widely anticipated, the slope of the curve was higher than expected.

Whilst the slope of the curve was higher than expected (0.64%). The consensus forecasts ranged between 16.2%-16.4%.

According to the position contained in the latest edition of the FDC Economic Bulletin, “the divergence with the global food price index at a decade-high of 133.2 points and with inflation in advanced economies aggressively on the rise, the integrity of Nigeria’s official inflation numbers comes to question.”

They noted that the US inflation soared to its highest level in three decades (6.2%) in October.

They also pointed that the lower inflation figure is not in tandem with the prevailing prices of commodities.

“There appears to be a divergence between the official data and market reality as the price of major commodities like cooking gas, vegetable oil, flour, pasta have surged by over 50% in the last year.

The principal drivers are the usual suspects – exchange rate pass-through, supply chain disruptions, money supply saturation, higher energy, and logistics costs. In the last year, the naira has lost 18.4% at the parallel market (N547/$).”, the report stated.

In their estimation, most of the low rates were a reflection of base-year effects. “A breakdown of the report showed a broad-based moderation across the inflation baskets.

On an annual basis, food inflation declined by 1.23% to 18.34%, core (inflation less seasonalities) dipped 0.50% to 13.24%, urban slowed by 0.67% to 16.52% while rural dropped by 0.60% to 15.48%. This is largely due to base year effects. The agric sector also benefitted from the CBN’s intervention,” the FDC economists said.

Managing Director/Chief Executive Officer, SD&D Capital Management Limited, Mr. Idakolo Gabriel Gbolade said, “Although the inflation rate in Nigeria has witnessed a steady decline for the past seven months with that of October following the same patter, this has however not reflected the realities on ground because of soaring food prices and the fast eroding purchasing power of the populace.”

He is of the opinion that the inflation index continues to decrease based on measures taken by government especially the CBN, saying however that the issues of insecurity and high cost of cooking gas and the impending hike in petroleum prices is a source of concern.

Nigeria’s inflation rate for the year so far has averaged 17.28% between January and October 2021, while the 12-month average change currently stands at 16.96%.

Analysts from Nairametrics observed that as the Central Bank continues to ensure increased spending in the economy by leaving the benchmark interest rate at 11.5%, the inflation rate continues to moderate from the significant upsurge recorded in the previous year.

They maintained that the fact remains that the average price of goods and services in the country increased by 15.99% in October 2021 compared to the corresponding period of 2020, indicating that the purchasing power of Nigerians has eroded further.

Inflation is the general rise in the price of goods and services over time. When an economy faces high inflation, people have to spend more money to buy the same quantity of goods and services before the rise in inflation.

Nigerians often complain that even when official statistics show that inflation is falling, they don’t feel the impact in their everyday lives. To understand why this is so, we must understand how the National Bureau of Statistics (NBS) calculates the inflation rate.

According to an economist and former Director-General of the Lagos Chamber of Commerce and Industry, (LCCI), Mr. Muda Yusuf “inflation is the major accelerator of poverty in Nigeria because it reduces the purchasing power of the citizens. It also reduces the real income and when we are faced with a situation that can be described as “Stagflation” it means nominal incomes are reducing”.

Speaking further he stated that inflation also has adverse effects on the mortality of businesses because as prices gallop not many businesses would be able to survive, regardless of sector.