Nigeria: Inflation - Mixed Outlook As Food Prices Remain High

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Against the backdrop of deceleration of inflationary pressures announced by the National Bureau of Statistics, NBS, last week, further insight into price movements in the first quarter of the year has indicated a mixed result.

Financial Vanguard and other analysts' reports indicate that the deceleration was principally a year-on-year, YoY, base effect rather than a decline in prices, especially in food and related items in the market.

The NBS report for March 2017 had indicated that inflation rate slowed further to 17.26 per cent YoY in March from 17.87 per cent YoY in February.

Giving a Month-on-Month, MoM, analysis of the parameters, economists at Cardinal Stone Partners Limited, a Lagos based investment house, stated: "The relatively slower pace of increase in YoY headline CPI (Consumer Price Index) primarily reflects the impact of base effects given the significant jump in the index in the corresponding period of 2016.

"On a month-on-month basis however, headline inflation accelerated to 1.72 per cent MoM against February level of 1.49 per cent MoM, as both the food and core sub-indices increased in March.

"We believe the drag from higher staple food prices is the direct result of higher export demand (given the significant depreciation in the Naira) as well as higher transport costs ( a major component of the core index)."

Contrary to inflation reports showing declines for two consecutive months this year (February and March) the petroleum products price watch released by NBS last weekend shows that huge gap still exists between average price of the products in the first quarter 2017 (Q1'17) and preceding quarter, Q4'16.

In the report average price of Kerosene in Q1'17 was N365.94 per litre, about 35 per cent higher than N269.15 recorded in the preceding quarter. Also average price of 5kg cooking gas at N2,589.84 was about 28.8 per cent higher than N2,010.6 recorded in the preceding quarter.

Regulated price of petrol

Similarly the report shows that average price of diesel in Q1'17 at N241.5 per litre was 25.1 per cent higher than N193.1 recorded in Q4'16 while the regulated price of petrol still commanded about 2.0 per cent higher pump price at national average of N149.3 per litre in Q1'17 as against N146.4 previous quarter. Moreover, prices of basic food items have steadily been on the increase up till March 2017 going by NBS reports of Selected Food Prices Watch released at the weekend.

Economists raise concerns

Reflecting on last week's CPI figures of the NBS, economists at Cordros Capital Limited, another Lagos based investment house, stated: "Given the faster increase in MoM inflation, we reiterate our position that the possibility of general price level significantly moderating this year remains uncertain, as the causal structural factors that pressured general prices in 2016 remain through the most of this year.

"More so, it appears that the peak of cost push inflation had been attained in 2016, thus strengthening the case for slower price increases this year.

"Driven by this matrix of facts, we prognosticate the headline index to sustain the base-effect driven moderation in the month of April, particularly in the absence of new FX-induced shocks and other related negative surprises, such as fuel and power tariff hikes. "However, we are concerned about the higher-than-expected MoM increase in inflation experienced in the last two months, which has constrained significant YoY moderation.

"Potential risk in this regard is the likely rise in the average pump price of petrol following the recent increase in the bridging allowance to transporters from N6.20 to N7.20 per litre, especially among independent operators outside major commercial cities where regulatory supervision is limited.

"For April, we estimate the CPI to further moderate by 36 basis points (bps) to 16.9%."

Also commenting on the NBS figures, analysts at Cardinal Stone Partners stated: "Base effects led the slight decline in YoY food inflation in March to 18.44% YoY (February: 18.53% YoY) since domestic food prices continued on an uptrend in March, increasing to a ten month high of 2.21% MoM (February: 1.99% MoM).

"The most significant price increases were observed on staples such as bread & cereals, protein, and tubers. "Imported food inflation moderated further to 18.15% YoY (February: 19.42% YoY) although it increased to 1.46% MoM (February: 1.39% MoM) given the significant Naira depreciation (at the parallel market) in February whose impact on prices of imported items may have lingered into March.

"The Naira has however appreciated by 13.1% on average between February and March, following improved dollar liquidity, and thus we expect a slower pace in MoM imported food inflation for April."

"From a monthly perspective, core inflation increased by 1.32%, 0.22 percent points higher than the 1.10% recorded in February. In March, the "Utilities - Housing Water, Electricity, Gas & Other Fuels", "Clothing & Footwear", "Transport" indexes grew by 18.89% YoY, 16.64% YoY and 15.42% YoY respectively, slower than February's figure of 20.41% YoY, 17.42% YoY and 16.77% YoY.

"Despite relatively lower energy prices the increase in MoM core inflation resulted from higher transportation costs - the NBS recorded a 3.96% MoM increase in transport fares, as well as a lagged impact of the significant Naira depreciation in February.

"Following the recent CBN policy that has boosted FX liquidity, we foresee a softening in MoM core inflation in the coming months."

Analysts at Cordros had also stated: "Indeed, the sustained slowdown in the CPI was unsurprising as we had guided to the continued impact of favourable base-effect in our previous inflation note.

Previous inflation note

"Also, the rise in month-on-month inflation (1.72% vs. 1.49% the previous month) validates our prognosis for the month, where we reiterated that the possibility of general price level significantly moderating this year appears very slim, as the causal structural factors (including sustained impact of high electricity tariff nationwide, pass through effect of a weak currency, and increased transportation cost due to higher fuel price) that pressured general prices in 2016 remain through the most of this year, and suggests that the recent appreciation of the local currency at the parallel market is being overshadowed by the downward sticky nature of prices.

"Again, as was the case in the previous month, all classification of Individual Consumption by Purpose (COICOP) which constitutes the headline index increased in March.

"Suffice to say that the magnitude of decline recorded by the CPI would have been bigger, save for the notable price increases reported in the following major divisions: housing, water, electricity, gas and other fuel, education, food and alcoholic beverages, clothing and footwear and transportation services.

"Food inflation increased to 18.44% YoY (vs. 18.53% YoY in February), albeit 9 basis points (bps) slower than the rate recorded in the previous month, supported by a 130bps drop in imported food inflation to 18.14% YoY, from 19.44% YoY, and lingering impact of a favourable base-effect.

"However, on a MoM basis, food inflation, notwithstanding the improvement in the forex market during the review period and a slower 6.07% MoM (vs. 13.53% MoM previous month) increase in the prices of 25 selected food items in the NBS Selected Food Prices Watch for March, climbed by 2.21%, a faster pace than the 1.99% recorded in February.

"We sense that prices in this segment were pressured by rising transport cost (8.24% MoM, 4.49% MoM, and 1.55% MoM increase in bus transport cost for within city, intercity, and water transport respectively). Notably, in March, the highest price increases were recorded by potatoes, yam and other tubers, bread and cereals, meat, milk, cheese, and eggs."