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Wednesday, 16 August 2017

Why Inflation Rate is creeping southwards

By United Capital
Nigeria's headline inflation rate has remained stubbornly high in 2017, down 2.6 percent to 16.1 percent in June-2017 vs. 18.7 percent in Jan-2017. While moderation in y/y inflation rate has been broadly driven by higher base effect, month/month inflation rate has risen consistently from 1.1 percent December 2016 to 1.9 percent in May 2017, averaging 1.6 percent in H1-2017 vs. 1.9 percent in H1-2016. So, why is m/m inflation rate unyielding despite improvement in the currency market?Related image
Core Inflation which isolates the transitory impact of food, energy and farm items has sustained downtrend since Jan-2017, settling at 12.5 percent in June-2017 vs. 21.1 percent in Dec-2016 due to improved forex market condition. Contrariwise, domestic food inflation rose to 19.9 percent in June-2017 vs.17.4 percent in Dec-16. Accordingly, elevated food prices have been the culprit.
Going forward, we think the sustained pressure on m/m inflation will keep the outlook on price level benign as high base effect fizzles out. Although a likely bumper harvest season may ease food prices, we do not see inflation rate below 14 percent by year-end if pressure on m/m inflation continues unabated. In fact, our model estimation suggests inflation may climb higher before December if m/m inflation averages above 1.0 percent in H2-2017. Thus, we project July inflation at 16.0 percent, if m/m inflation falls sharply to 1.1percent

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