Thursday, August 5, 2021

    Analysts expect upward pressure on inflation as insecurity distorts food distribution

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    Godwin Okafor
    Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

    Inflation Rate Falls Further to 17.93% in May 2021 on High Base Year Effect…
    Recently released data from the National
    Bureau of Statistics showed that headline
    inflation further declined for the second
    consecutive month to 17.93% in May (lower
    than 18.12% recorded in April).

    The contraction in inflation rate was partly driven by the base effect of higher inflation recorded in May 2020
    and a slower increase in the food index to
    22.28% (from 22.72% in March).

    We saw a rise in prices of bread, tea and cocoa, milk, bread, cereals, meat, fat and vegetables amongst others.

    Meanwhile, imported food index rose by
    16.98% (from 16.90%) as Naira further
    weakened against the greenback at the BDC
    and Parallel markets – CBN recently harmonized USD/Naira official rate to the NAFEX rate.

    Amid demand pressure on the foreign currency, two months moving average foreign exchange rates at the BDC and Parrellel markets rose (Naira depreciated) m-o-m by 0.41% and 0.29% to N480.52/USD and N485.43/USD in May 2021.

    On the other hand, core inflation rose to 13.15% (from 12.74% in April) driven by rise in price of pharmaceutical products, shoes and other footwears, fuels and lubricants for transport services, furniture and finishing amongst others.

    On a month-to-month basis, the rise in inflation rate reflected the hike in prices as the country continues to grapple with the structural challenges, worsening insecurity and higher transport cost amid sustained increase in the prices of crude oil at the international market.

    Hence, headline inflation expanded to 1.01% (from 0.97% in April) amid increases in food inflation rate to 1.05% (from 0.99% in April).

    Core inflation rose to 1.24% (from 0.99% in April) due to rising clothing and footwear cost (+1.96%), transport (+1.09%) and water, electricity, gas and other fuel costs (+0.69%).

    Urban and rural annual inflation rates moderated to 18.51% (from 18.68%) and 17.36% (from 17.57%) respectively in May.

    In another development, the crude oil prices at the international market continued to increase as more countries lift travel restrictions, and the Organisation of the Petroleum Exporting Countries (OPEC) and its allies maintained strong compliance with agreed production output cut.

    Given the tightened supply as demand increase, the West Texas Intermediate (WTI) crude price rose by 3.13% w-o-w to USD72.15 a barrel.

    Also, Bonny Light and Brent Crude prices increased by 4.11% and 3.00% to USD74.68 and USD74.39 per barrel respectively as at June 16, 2021.

    According to the U.S Energy Information Administration, the the US crude oil input to refineries rose by 2.59% w-o-w to 16.34 mb/d as at June 11, 2021 (It also rose y- o-y by 20.15% from 13.60 mb/d as at June 12, 2020).

    However, Nigeria appears not to be optimizing the benefits from the rising crude oil prices as its average production output fell m-o-m by 4.93% to 1.38 million barrels per day in May 2021 from 1.46 million barrels per day recorded in April 2021.

    More so, as the country is heavily reliant on imported PMS to satisfy domestic demand, the rising crude oil prices further increases the cost of the commodity at the pump, which, given the Federal Government’s insistence on subsidising consumption of PMC, makes little resources available for economic development.

    Recently, the Nigerian National Petroleum Corporation (NNPC) revealed that it was paying N120 billion to settle petroleum subsidy monthly.

    We expect to see upward pressure on the m-o-m inflation rate due to the rising insecurity which continues to negatively impact food distribution across the country.

    Also, the relatively strong demand for foreign exchange should further put pressure on cost lines of businesses which rely on importation of capital goods.

    Meanwhile, should FG move to completely give up on subsidy payment in line with recommendations, we note the rising crude oil prices may have an adverse impact on the declining y-o-y inflation rate.

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