Inflation Set To Spike As Economy Moves From Safe Mode To Active

Inflation rate has been creeping, but steadily over the past months. In Fact, the inflation rate has risen eight times in nine months. Analysts believe that with the imminent appointment of ministers into various portfolios soon, the rate is expected to be activated into active mode.
Also, the flood in North West is said to have destroyed 11 percent of total rice production, and as such, the prices of rice may increase later in the year.
Analysts believe that with the Federal Government under pressure to spill the dividend of not only democracy, but including that of change, spending will be high. This will leave the Central Bank of Nigeria (CBN) the challenge of ensuring price stability, a task that will really trying for the central bank.
Both analysts at the Financial Derivatives Company (FDC) Limited and FSDH agreed that inflation will rise to 9.4 percent in September.
Bismarck Rewane, chief executive officer of Financial Derivatives Company (FDC) Limited said, “If this happens, inflation would have increased in eight out of the nine months so far in 2015”, he said.
He believes that the current inflationary trends seem to be more structural despite CBN’s statement in its July communiqué that the inflationary pressures were transient.
“With the cabinet set to take their portfolios in a few days, the Nigerian economy will be shifting from safe mode to active. We are therefore expecting that inflationary pressures that have been relatively benign will become more potent”, he explained.
The primary catalysts of price inflation in Nigeria are cost-push factors. Rewane thinks these are being intensified by the restriction of dollars for some critical inputs. 
“However, this increasing inflationary trend is happening at a time when the price of diesel has dropped by 33 percent from N160 to N108. Diesel is the fuel used by transporters of goods from the farms to the markets.
“Despite a favourable harvest of food items such as tubers and cereals, there was a modest uptick in September’s price levels, mainly due to the increase in the prices of imported food items such as milk, wheat and sugar. Furthermore, increased demand for livestock products due to the Eid-el-Kabir celebrations led to higher inflationary pressures from the food index”, he added.
It is believed that the recent release of the President’s ministerial list will help ease investor uncertainty. Though the new cabinet did not stir up much enthusiasm, the stable environment created by revealing the President’s team will help foster positive investor sentiment.
The FDC Lagos urban inflation index increased to 11.56 percent in September, up 0.54 percent from 11.02 percent in August. This is in line with the rising trend in headline inflation.
The year-on-year (y-o-y) food index decreased to 13.62 per cent from 11.76 percent, while the y-o-y non-food index also decreased to 10.51 percent, from 10.65 percent  in August. The increase in the urban inflation was driven by the increase in food prices due to Sallah celebrations, even though the harvest period muted increases in food prices. Prices of onions increased significantly in September. We expect further price increase in October as preparations for year end celebrations commence.
It is expected that headline inflation will increase further in October as preparations for year end festivities will increase demand for both food and non-food items. Furthermore, floods in the Northwest region of the country have destroyed rice plantations equivalent to circa 11 percent of the quantity of rice required to meet Nigeria’s yearly consumption. The lagged effect of this rice shortage will most likely start in October.
There has still been rising inflation despite shrinking money supply. Though the reduction in CRR is expected to lead to increased money supply, there will not be a significant rise in money supply in the near future and its effect will be noticed in the coming months. 
“We expect inflation to keep on rising till the end of the year due to higher spending during Christmas celebrations”, said Rewane.
The FSDH also expects the September inflation rate (year-on-year) to inch up marginally to 9.4 percent because of a marginal increase in the prices of some food items. The National Bureau of Statistics’ (NBS) would release the inflation rate for the month of September 2015 on October 15, 2015. 
The FSDH believes that food prices in the month of September at the international market also increased marginally. The Food and Agriculture Organization (FAO) Food Price Index (FFPI) for the month of September 2015 released today October 8, 2015, shows that the Index averaged 156.3 points. This is 0.8 percent marginally higher than the value in August 2015, but still 18.9 percent less than September 2014. According to the FAO, the slight increase in the Index in September was largely driven by sugar and dairy products quotations. The increase in the FAO Dairy Price Index (up five percent) is premised on the higher milk powder quotations from New Zealand, where a substantial reduction in payouts caused farmers to scale-back production. Also, Sugar Price Index (up 3.2 percent) was largely driven by weather conditions. There was however a marginal weakening in the cereal prices. 
The expected decline in world maize production helped to curtail the persistent downward pressure occasioned by large inventories and generally good crop prospects. The FAO Meat Price Index was (down 0.4 percent) barely unchanged from the previous month’s value, this was supported by lower feed costs and poultry prices. The FAO Vegetable Oil Price Index was down 0.5 percent from August. The slide in the Index mainly reflects falling prices for palm oil, as ample inventories, especially in Malaysia kept prices under pressure.
“Our analysis indicated that the value of the Naira was unchanged when compared with the value of the US Dollar in the month of September. We note that the value of the Naira gained by 1.51 percent in the parallel segment from $/N235.00 to $/N231.50. Given the general movement in the international food prices between the two months under review, the stable value of the Naira in September had a muted impact on imported inflation”, FSDH report said.
The prices of food items that FSDH Research monitored in September 2015 moved in different directions. The prices of food items such as Irish potatoes, tomatoes, yam, garri and fish dropped by 20.74 percent, 18.81 percent, 4.17 percent, 1.59 percent and 0.65 percent respectively. 
However, the price of onions increased by 77.78 percent. Meanwhile, the prices of rice, beans, sweet potatoes, vegetable oil and palm oil remained unchanged. The movement in the prices of food items during the month resulted in 0.67 percent increase in our Food and Non-Alcoholic Index to 181.32 points. We also noticed an increase in the prices of Clothing and Footwear, Alcoholic Beverages, Tobacco & Kola and Education between August and September 2015.
Our model indicates that the price movements in the consumer goods and services in September 2015 would increase the CCPI to 176.56 points, representing a month-on-month increase of 0.66 pent. We estimate that the increase in the CCPI in September will produce an inflation rate (year-on-year) of 9.4 percent. Looking ahead, the inflation rate for the month of October 2015 is expected to be higher than the September 2015 figure.

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