Report: Modest Food-price Disinflation Recorded in Jan

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 Despite the pressure being exerted on the Nigerian economy by the twin- challenges of preparation for next month elections and the disruptions to agricultural production as a result of the activities of Boko Haram in the North-east, Nigeria still appears to be experiencing modest food-price disinflation.

This information was contained in the latest edition of the Standard Chartered-Premise Consumer Price Tracker (SC-PCPT) report, which reveals a 0.5 per cent m/m decline in January prices and a 1.3 per cent fall since August 2014 when Standard Chartered first started tracking prices.

“To date, nationwide inflationary pressure as a result of the unrest in the northeast has not been evident. However, the authorities have expressed concern over disruptions to agricultural production as a result of the deteriorating security situation in the region. The number of internally displaced people is estimated by the UNHCR at over 1.5mn, and Maiduguri–the largest city in north eastern Nigeria–has been the target of a Boko Haram offensive in recent weeks, marking a significant escalation of the conflict,” said a report by the firm titled: Nigeria –The SC-PCPT and delayed elections.

However, the report noted that “weak economic linkages between the north-east and the rest of the country is one explanation; other factors may also be limiting price increases.”
It explained further that the naira weakness and government spending are both passed through to prices with a lag, which may be delaying their inflationary impact.

Continuing, the report said the slowdown in economic activity as a result of weaker oil prices and increased pressure on public finances may also be limiting the pass-through to inflation. “Nigerian fuel prices were cut modestly in January, by c.10 per cent, but global prices of agricultural commodities have also decelerated.
The FAO food price index has fallen every month since April 2014, apart from a brief hiatus in October. Nigeria’s inflation trends may reflect these global trends,” the report stated.

It added that for many sub-categories of the SC-PCPT, a wide divergence persists between price trends in Lagos and Kano, making it difficult to discern a national trend. Most of the prices captured in the tracker are for goods sold in Lagos and Kano, with some data also gathered in Abuja and Port Harcourt.

Meanwhile, the financial advisory firm, Financial Derivatives Company has suggested that the commencement of the planting season as well as panic buying and anxiety towards the 2015 general elections are expected to further raise the headline inflation for the month of February.

It added that the sentiment of inflationary expectations points to a more pronounced increase in consumer prices in February to 8.5 per cent, saying this is likely to be spurred by the weaker naira in the forex market and the resultant imported inflation.
“Other factors likely to fuel a further increase in consumer prices in the near term include higher money supply (M2) as well as the disbursement of capital votes after the 2015 budget is passed.
“A spike in the rate of inflation will undermine monetary policy objectives and threaten the already fragile macroeconomic situation,” it warned.

The research firm said since the meeting of the Monetary Policy Committee of the Central Bank is weeks away and the external reserves level is lower than $33.2billion; the CBN is likely to consider adjustments of its monetary policy before the scheduled meeting in March.
It added that any further delay in making a devaluation decision is likely to be politically inexpedient and very expensive. “Therefore, it is our view that devaluation is now imminent and inevitable.”

For the month of January, FDC came up with a double forecast scenario. In the first scenario, Nigeria’s headline inflation rate in January is projected to remain unchanged from that in December 2014 at 8.0 per cent (60 per cent probability). This shows that the inflationary effect is lower than expected and has been tempered by the persistent decline in global commodity prices. Thus, prices are yet to reflect the impact of the recent currency devaluation by the Central Bank of Nigeria (CBN).

The second scenario projects an increase to 8.3 per cent (40 per cent probability). This is based on adjustments for the impact of a weak currency, positive money supply growth and the commencement of the 2015 planting season.
The delayed effect of the currency devaluation and the weak transmission mechanism between policy and markets is likely to manifest itself in the months of February and March. If the CPI comes in at 8.3 per cent, it will be 0.7 per cent below the CBN target ceiling of 9 per cent.

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