By Chinwendu Obienyi
With the National Bureau of Statistics (NBS) expected to publish the consumer price index (CPI) data this week, strong indicators are pointing in the direction that headline inflation might hit a new high of 27.9 per cent.
Economic analysts at Afrinvest, are linking the anticipated surge to the depreciation of the naira to FX rate and high prices of Premium Motor Spirit (PMS) and diesel as the likely factors that will strain the food and core CPI baskets in the new awaited figures.
Headline inflation in September, rose for the ninth consecutive month by 92 basis points (bps) to 26.7 per cent year-on-year (y/y) – the highest since 28.2 per cent in August 2005.
Like most of the prior months, the increase in the headline rate was jointly stirred by pressure on both the food (up 70bps to 30.6 per cent y/y) and core (up 59bps to 21.8 per cent y/y) baskets.
On the back of that trend, analysts at Afrinvest estimated a further 102bps spike in the headline rate for October to 27.9 per cent y/y. They noted that despite estimation of a modest boost to food supply due to the ongoing green harvest, the combined effect of low-base year and rising transportation costs pose significant risks to food inflation.
They further added that the material depreciation of the FX rate in the month (official and parallel market rates tanked 8.0 per cent and 15.1 per cent, respectively to N815.32/$1 and N1160.00/$1), coupled with the high price of Premium Motor Spirit (PMS) and Diesel (AGO) amid a surge in global crude prices, is estimated to have further strained the core basket.
“We forecast the headline inflation to increase by 2.2 per cent month-on-month (m/m) (September: 2.1 per cent), to reach a 12-month average of 2.1 per cent. This monthly inflation print implies an annualised consumer inflation rate of 23.4 per cent vs 22.8 per cent in September.
“In our view, taming the spiraling inflation scourge would require a simultaneous deployment of harmonised supply and demand side strategies. On the demand side, the CBN under its new management team must rein in the growth of money supply – M3 grew 40.1 per cent annualised in September compared to the annualised real output growth of about 2.5 per cent in the same period,” they said.
Furthermore, the analysts noted that the lag effect of robust liquidity management should be positive for taming inflation, adding that market rates must be allowed to clear at a level high enough to incentivise investment and savings in a high inflation-battered environment.
“In addition, fiscal spending must be more tilted towards value-creating capital spending as against consumption-focused recurrent needs. On the supply side, the quick win would be to ease restrictions on food imports in the form of lesser tariffs while a more long-term approach would be to tackle the structural issues that affect food supply, especially security, transportation, and logistics”, Afrinvest said.
Meanwhile, amid the inflationary pressures, the equities market (NGX-All Share Index) gained 4.3 per cent in October, bringing the year-to-date (YTD) return to 35.1 per cent, thereby outperforming the inflation rate in the first 10 months and analysts have said the projection will not dampen market sentiment in November due to favourable valuations of many bellwethers and the gradual return of foreign portfolio investment (FPIs).
It however, said it does not rule out the possibility that rising FI yields could douse the performance of equities.