The trend has been on upswing month-on-month for the past ten months, culminating in a huge 6-year high recorded in May. National Bureau of Statistics, NBS, is expected to release its June figures this week. Research reports by FSDH Merchant Bank and Financial Derivatives Company, FDC, headed by Nigeria’s leading economist, Bismark Rewane, were in agreement that the headline rate for June would show a stabilizing range between 15.39 and 15.5 per cent. The stability would be coming at the backdrop of two major cost-push developments in the macroeconomic policy environment, notably, the upward price adjustment in petroleum products in May and the huge depreciation of the Naira against major currencies in June. In its report FSDH said it expects the marginal drop in inflation to come from decrease in the prices of tomatoes, beans and rice. Reflecting on the impacts of the two major cost-push developments in the economy, FSDH said “we believe the depreciation in the inter-bank foreign exchange rate did not translate to an increase in domestic prices because most transactions were earlier carried out at parallel market exchange rate”. According to economists at the investment bank “the prices of food items that FSDH Research monitored in June 2016 dropped on the average compared with May 2016. “The prices of tomatoes, Irish potatoes, rice and beans were down by 38.41%, 4%, 3.33% and 2.56%, while the prices of Irish potatoes, onions, vegetable oil, palm oil, fish and yam increased by 8.33%, 6.67%, 5.56% 5.56%, 1.96% and 0.46%. Meanwhile, the prices of garri and meat remained unchanged. “The movement in the prices of food items during the month resulted in a 0.79% increase in our Food and Non-Alcoholic Index to 203.32 points. We also noticed increases in Clothing and Footwear; Housing, Water, Electricity, Gas & Other Fuels divisions between May and June 2016. “Our model indicates that the price movements in the consumer goods and services in June 2016 would increase the CCPI (composite consumer price index) to 199.82 points, representing a month-on-month increase of 0.76%. We estimate that the increase in the CCPI in June will produce an inflation rate of 15.39%”. FDC, in its own report stated that “after an almost unstoppable rise in headline inflation to a record high, the economy may be entering an era of disinflation or declining rates of inflation. “We are projecting inflation in June to drop from 15.6% to 15.5%. If this estimate turns out to be accurate, it will raise some fundamental questions as to the direction of inflation and possible level of interest rates in the money markets. However, FDC noted that headline inflation in Nigeria had almost been a loose cannon, defying most rules of economic gravity and logic, adding that the root cause of the near hyper inflation rate experienced in the last ten months can be traced to supply shocks, sometimes attributable to artificial scarcity compounded by uncertainty in the foreign exchange markets. The big question, according to them, is whether this drop in inflation is a blip or a point of inflection. On the likely impact of a stability in the financial markets, FDC noted that the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, scheduled to meet next week will be closely monitoring the inflation data. They stated “a lower inflation number will ease the pressure on the policy makers. However, a precipitated move such as lowering rates is an unlikely outcome at this meeting. “In aggregate, we see an upward shift in interest rates move out of the risk mitigation attitude of the market than as a result of the inflation data”. On the exchange rate they noted that Naira is still trying to find its true value in the transition from an imperfect towards a more efficient market, adding that the apparent lack of liquidity in the spot market is hampering the effective development of a forward and futures market. Consequently, FDC stated, “a 0.4% of a decline in the rate of inflation will be exchange rate neutral”. They also noted that the market will be looking forward to CBN’s willingness and ability to settle the 90-day foreign exchange forward contracts entered into on June 20, 2016, which will mature on September 17, 2016. They added that analysts will derive some comfort from a lower inflation rate because the Purchasing Power Parity (PPP) value of the Naira will actually appreciate.
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