For Nigerians, Tougher Times Ahead with Rising Inflation

With the double-digit inflation for the month of February released last Tuesday, which has been described as the worst in three years, it is evident that the impact of the widening gap between the official and parallel forex market rates is already being felt by ordinary Nigerians, writes Kunle Aderinokun

The latest figures from the National Bureau of Statistics showed that consumer price index (CPI), which measures inflation (the average change over time in prices of goods and services consumed daily by people), increased to 11.4 per cent in February. This represents about 1.8per cent rise over the 9.6 per cent inflation in January.

The hike in inflation negates the ideal and effort of the Central Bank of Nigeria (CBN) to keep inflation in check. The development will no doubt adversely affect the pattern of economic growth and it has put paid to pundit’s projection of weaker economic growth in the first quarter of this year.

In churning out the figures, NBS attributed the increase in inflation, which is the headline index, to the faster pace of increases across almost all major divisions, which make up the headline index, with the exception of restaurants and hotels division which only increased at a slower pace. The headline index is made up of the core index and farm produce items. Processed foods are included in both the core and food sub-indices.

According to the statistics bureau, the Food sub-index, a major component of the CPI, increased by 11.3 per cent, up by 0.71 percentage points from rates recorded in January. In the month under review, all major food groups which contribute to the Food sub-index increased at a faster pace during the month with the exception of the Potatoes, Yams and Other Tubers; and Sugar, jam, honey, chocolate and confectionery groups.

The “All Items less Farm Produce” or Core sub-index, increased at a faster pace in February as imported items as well as other domestic shocks resulted in ripple effects across many divisions that contribute to the core. The index increased by 11.0 per cent in February, about 2.2 percentage points from rates recorded in January.

A cursory analysis shows that on a month-on-month basis, the headline Index increased at a faster pace in February relative to January.

With the dollar exchanging for N320 or thereabouts, and the rate being on the upward swing most times in the recent months, higher exchange rate of the dollar to the naira, has been identified as a contributor to pushing up the food index rate. For instance, according to NBS, Imported food items as well as other necessary inputs to producing key local staples such as bread continue to drive the food index higher.

The Food index increased by 11.3 per cent (year-on-year) 0.7 percentage points higher from rates recorded in January. “The highest price increases were recorded in the Fish, Vegetables and Bread and Cereals groups for the second consecutive month. On a month-on-month basis, the Food sub-index increased by 1.4 per cent in February, 0.45 per cent points higher from rates recorded in January.”

Cause and Effect of Inflation Hike

Economic analysts, in their opinion, were not surprised about the sharp increase in inflation as prevailing factors pointed to it.

Executive Director, Corporate Finance Department of BGL Capital Ltd, Femi Ademola, noted that, “the rise in inflation is not unexpected considering the foreign exchange situation and the effect on import goods (which is a significant portion of our domestic consumption).”

He added that, “the power infrastructure such as power and transportation also affect local productivity and thus supply of goods; further putting pressure on inflation.”

Positing that “the impact on the economy will be mostly theoretical at the best since growth is already stunted,” he however added that, “it doesn’t appear that we have any room for any adjustment to counter the inflation except for oil price to recover very strongly and the budget to be passed quickly so that capital developments can start.”

In his own assessment of the latest development, Managing Director, Eczellon Capital, Diekola Onaolapo, said, “the sharp depreciation of the naira in the month of February is the principal reason for the rise in food inflation which impacted the overall CPI (Consumer Price Index) given its weight to the overall index computation”

He added that the ensuing scenario, “invariably questions the effectiveness of CBN current monetary policy stance with respect to the naira, which the CBN has held steady in the last 12 months with a view to shielding the economy from higher food prices.”

Consequently, Onaolapo, therefore expressed the belief that “the current economic reality would force the MPC (Monetary Policy Committee) members to debate extensively on the FX situation compared to its previous meetings with a view to returning flexibility and normalcy to the FX market in the country.”

Unpleasant Devt for Economy

While many may not be surprised about the development, the new inflation figure has come with its negative consequences.

According to the immediate past managing director and chief executive officer of Guinness Nigeria Plc, Seni Durojaiye, it’s unfortunately bad news for the economy. “At 11.4 per cent inflation, we are witnessing the highest in over 3 years.

The sad thing is that this is being driven by price increases in major food items; such as bread, fish, etc, which you would typically consider as basic.”

“In truth, it was easy to see this coming with the Naira going south in the last few months and “every” trader attributing their claimed input cost-rises to this depreciation, irrespective of whether or not their wares had any import-inputs. Inflation was always bound to show up the way it has,” he noted.

For manufacturers of consumer-packaged goods, Adetu pointed out, “this is a very difficult place to be.

For a start, they are genuinely battling with forex induced cost-rises (as in some cases, these manufacturers import 40 per cent to 60 per cent of their raw materials); without a resultant opportunity to increase consumer prices due to the softness of the economy.”

“They are battling with capacity under-utilisation, as not only is the forex expensive, its supply remains grossly inadequate. This run-away food inflation just further depresses consumer’s disposable incomes and constrains aggregate consumer demand.

The combined effect of depressed margins and low demand is a massive double whammy for these companies.

Imagine the implications on employment, on the ability of these companies to re-invest in capital expenditure (for expansion or technology upgrade) or indeed to invest in employee capability. It’s a big blow!,” Adetu lamented.

Weak Purchasing Power, Weak Demand

For the FBNQuest’s Macroeconomic and Fixed Income Analyst, Chinwe Egwim, she is of the view that “this hike in inflation weakens purchasing power thus leading to a squeeze in pockets,” and as such “sales could drop as demand may soften”

Similarly, Egwin added, “cost of production is likely to rise since prices of raw materials are more expensive. Profit margins will be hit.”

Stating that “at this moment, real yields across the curve are now negative, the bond market is very unattractive to portfolio investors,” she however added that, “as bond prices decline in response to higher inflation, yields are expected to adjust upwards.”

Double-digit Inflation to Remain

With the prevailing economic situation and especially, the soon-to-be-passed expansionary 2016 appropriation bill, analysts have projected that inflation will remain at double digit in the coming months. According to Ademola, “at the moment, double-digit inflation appears to be the new normal.

This position was echoed by Onaolapo, who stated: “We do not see a reprieve in the current month due to the lingering effects of the inflation drivers. In the coming months, we expect inflation to remain in the double-digit region due to possible pressures from the proposed 2016 expansionary budget of the federal government and lag effects of the naira depreciation.”

From all indications, Nigerians would have to be prepared for the worst as tougher times are on the horizon except measures are put in place to mitigate the effect of the rising inflation.

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