Inflation Set to Buck its Declining Trend

Wednesday, October 9,
2019   / 
11:44AM  / By FDC  / Header Image Credit: BBC


Our survey shows that headline inflation in September is likely to spike
to 11.22%. This is coming after three months of consecutive decline. This spike
in the general price level would be driven partly by the closure of the Seme
border which has resulted in shortages of smuggled commodities especially rice,
turkey, chicken and baking margarine. The price of a 50kg bag of rice increased
by almost 30% to N24,000 per 50kg in September from N18,000 per 50kg in August.
Also, consistent with this, is the monthly inflation which is projected to
increase by 0.02% to 1.01% (12.87% annualized).


However, the core sub-index (inflation less
seasonalities) is likely to decline to 8.60% from 8.68% in the month of August,
supported by the stability of the exchange rate. The naira was relatively
stable within a band of N358-N360/$ in the parallel market during the period.


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Source: NBS and FDC Think Tank 


Other inflation stoking factors noticeable in the month are:

  • Broad
    money supply grew by 5.65% in the month of August as stated in the MPC
    communique. Likewise, credit to the private sector rose by 2.22% to N24.83trn
    during the period, due to the mandatory 60% LDR. Also, there was a decline in
    lending rates (18-20% pa).
  • The
    exchange rate was relatively stable across all market segments in September,
    supported largely by the CBN’s continuous intervention in the forex market (an
    increase of 7.25% to $845.11bn). However, the frequency and amount of
    intervention in subsequent months could be limited by the steady depletion of
    the gross external reserves. The gross reserves lost approximately $2.09bn in the
    last month, now at $41.52bn.
  • FBN’s
    Purchasing Managers Index (PMI) reading was up 5.3 points to 56.2 points in
    August. This reflects an improvement in manufacturing sector activities and is
    an indication of higher output.


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Peer Comparison – Rising risk of global recession and domestic

inflationary trend across Sub-Saharan Africa (SSA) was mixed. Three of the SSA
countries under our review have released their October inflation numbers.
Uganda and Kenya recorded declines while Zambia’s inflation rate increased.


Central Banks in the advanced economies have resumed an accommodative stance
due to global economic slowdown, US/China trade war and Middle East tensions.
In line with this, emerging markets Central Banks are also taking a more
accommodative stance to support growth. Most of the SSA countries under our
review maintained status quo at their last monetary policy meetings, with
Zambia being an outlier.


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Source: Trading Economics, * August inflation numbers, **September



a bid to boost lending to the private sector, the CBN raised the LDR by 5% to
65%. This will compel banks to increase lending to the private sector. Another
pressure point for inflation is the impact of the arrears on the minimum wage
and the implications of the consequential costs on general prices. Also, as we
move closer to the Christmas period, we anticipate a boost in aggregate demand,
which is likely to drive up domestic commodity prices in the coming months.


addition, if growth numbers are released on November 25th as scheduled by the
NBS and it is tepid, then the probability of the country slipping into
stagflation becomes higher. Stagflation is a combination of unde-sirable
economic outcomes (stagnant growth and rising inflation). This will be a front
burner issue for the MPC at its next meeting on November 25/26.


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