Headline inflation set to spike to 22.8% as food inflation rises to 24.85% in June – FDC



Headline inflation is likely to surge to 22.8 percent in June from 22.41 percent in May as food inflation is expected to further increase to 24.85 percent.

This projection ahead of release of inflation figures by the National Bureau of Statistics next week is based on the time series model and survey of major retail markets in the Lagos Metroplex by Financial Derivatives Company Limited.

“If our projection turns out to be accurate, it will be the sixth consecutive monthly increase and the highest inflation rate in 18 years. It will also be 13.8% above the upper bound of the CBN’s 6-9% target. The sustained rise in the general price level is mainly because of the spike in the food basket (estimated at 24.85%) due to the Eidel-Kabir celebration and planting season effect,” FDC disclosed in its pre-inflation report released on Wednesday.

According to the report, increase in the price level was compounded by higher transport and logistics costs owing to the removal of the petrol subsidy. Notably, the price of pepper jumped by 225 percent to N65,000 while the price of tomatoes peaked at N110,000 before slipping back to N75,000. The seesaw price movement was more in response to consumer resistance and switching to substitutes. The customer behavior in the local markets has been a classic example of the income and substitution effect of price changes.

These expectations are also becoming self-fulfilling as businesses anticipate higher costs and adjust their prices accordingly.

“Individuals, in turn, may demand higher wages to keep up with the expected inflation, creating a cycle of rising prices and wages. Fuel subsidy elimination: With the removal of the fuel subsidy, the price of PMS has risen by 150 percent to an average of N500/litre,” FDC disclosed.

The economic research company noted that increase in energy costs is beginning to reflect in the prices of transport and food, contributing to inflationary pressures and raising inflation expectations.

“This is in addition to the ongoing exchange rate unification process, which has caused the official exchange rate to depreciate; prices are now being adjusted to reflect the prevailing exchange rates.

“Already, marketers are beginning to import PMS at the new official exchange rate, which will likely push fuel prices to N600 – N700 per liter in the coming months.

“FDC’s econometric model shows that core inflation will increase by 0.31 percent to 20.35 percent in June. Month-on-month inflation, which reflects the current economic situation, is also expected to remain elevated, rising further to 2.16% (annualized at 29.16%) in June from 1.94 percent (annualized at 25.93%) in May.

“The report further showed that core inflation, which is inflation less seasonalities, is expected to increase by 0.31 percent to 20.35 percent in June from 20.04 percent in May.

“This increase will be driven by currency depreciation and rising logistics costs. In June, the naira depreciated sharply by 43% at the parallel market to close the month at N840/$. Also, the price of diesel and PMS remained elevated in June,” FDC noted.

Meanwhile, FDC has argued that policy reforms play a significant role in shaping inflation expectations in Nigeria.

The report hinted that with properly designed and effectively implemented policy reforms, inflation expectations can be anchored at lower levels, thereby reducing uncertainty and facilitating economic planning and investment decisions.

In Nigeria, major policy reforms have been announced and implemented in the last month, which will most likely drive inflation expectation.

While inflation is beginning to taper across sub-Saharan Africa, it is expected to worsen in Africa’s largest economy until the third quarter.

The lingering planting season characterized by food shortages, currency depreciation and the impact of the fuel subsidy elimination on food and transport prices are factors that will sustain high inflation.

In line with the decline in global commodity prices, inflation in most countries in sub-Saharan Africa has begun to ease.

Four of the six countries under review reported a lower inflation rate.

The data shows that Uganda’s inflation rate moderated to 4.9 percent in June from 6.2 percent in May.

This is the fifth consecutive monthly decline and lowest rate in over a year.

The decline was largely driven by lower prices of food items and other related items including Waragi (local gin). Inflation also eased in other countries like Kenya, South Africa, and Zambia.