Inflation Rate May Rise to Highest Level Since January 2019 - FSDH

Friday June 07, 2019 / 04:48 PM / FSDH Research

If FSDH Research's May 2019 inflation rate forecastcomes true, Nigeria may record the highest inflation rate figure since January2019. That would not be good news for the economy or the purchasing power ofNigerians. Most people say they would not appreciate a situation where theprices of consumer goods increase faster than the expected increase in theapproved National Minimum Wage. We expect the May inflation rate to furtherincrease marginally to 11.39% from 11.37% recorded in April 2019. In addition,we expect the month-on-month change in the Consumer Price Index (CPI) toincrease by 1.10% in May 2019, the highest since January 2019. With the onsetof the rainy season, we have observed upward pressure on the food component ofthe inflation basket.

The major driver of the expected increase in theinflation rate is the increase in food prices, due to the seasonality effecttypically associated with the onset of the planting season. Security challengesin some food producing regions in Nigeria reduce the supply of food items,leading to an increase in prices. The current inflation rate is higher than the6% - 9% target set by the Central Bank of Nigeria (CBN). Given currentrealities, the inflation rate will remain above the CBN's target in theshort-to-medium-term. This may reduce the real yield on xed income securities.

The price monitor that FSDH Research conducted oncertain food and non-food items in May 2019 shows that most prices increased inMay compared with April. A cursory look at the movement in prices at theinternational market and its likely impact on prices in the local marketdemonstrate an increase in imported inflation (i.e. prices of goods usingimports as raw materials). The Food Price Index that the Food and AgricultureOrganization (FAO) of the United Nations published for the month of June 2019,shows that the prices of some food items increased. The prices of milk, butter,cheese, maize and meat increased on the international market while prices ofoils, wheat and sugar declined. Most of the increases recorded on theinternational market were mainly as a result of limited export availabilitiesand improved global import demand.

Meanwhile, the value of the Naira at end-May wasN360.43/US$ compared with end-April N360.40/US$ indicating a marginal loss of3kobo in the value of the Naira. The depreciation in the Naira coupled with therise in the prices of food items on the international market mean an increasein the local price of imported food items.

We consider the CBN may pursue economic growth at theexpense of the inflation rate in the short-term. It may however, adjust itsmonetary policy tools such as Open Market Operations (OMOs) to reduce excessivesupply of cash in the system. FSDH Research notes that one of the ways toreduce Nigeria's inflation rate in a sustainable manner is to improve theinfrastructure in the country. Good transport network, good storage facilities,measures to increase farm yields, provision of securities and strategies toensure linkage between the farmers and the industrial sector will increase thesupply of food items, increase profit margin and lower the inflation rate.

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