Nigeria: Higher Food Prices Push Up October Inflation - Analysts

7 November 2018

Nigeria's inflation rate has been projected to rise for the third consecutive month in October, driven by continued increase in food prices, occasioned by herdsmen attack on farmers and recent episodes of flooding which undermine food supply across the country.

This was the consensus of analysts' projections from FSDH Merchant Bank and Financial Derivatives Company (FDC) Limited.

Recall that after 18 months of decline, inflation rate (year-on-year) rose in from 11.14 percent in July to 11.23 percent in August and further to 11.28 percent in September.

While the National Bureau of Statistics (NBS) is scheduled to release the inflation figures for October next week, analysts at FSDH Merchant Bank and FDC projected 11.34 percent and 11.35 percent inflation rates respectively for October, citing continued impact of rising food prices.

They however noted that the stability of the exchange rate, increased power output and lower liquidity in the interbank money market had moderating effect on the inflation rate in October.

"FSDH Research expects the inflation rate (year-on-year) to increase further to 11.34 percent in October 2018 from 11.28 percent recorded in September. The expected increase in the inflation rate will reflect higher prices observed within the Food and Non-Alcoholic Beverages division", said FSDH analysts.

FDC analysts on their part stated: "Headline inflation is projected to increase marginally by 0.07 percent to 11.35 percent in October. If our projections are accurate, it will mark the 3rd consecutive month of rising inflation after a sustained period of declining price level."

Inflation drivers

On the main driver of inflation rate in October, FSDH analysts said: "The prices of food items that FSDH Research monitored in October 2018 moved in varying

directions, and led to an overall 0.95 percent increase in our Food and Non-Alcoholic Index. This Index increased year-on-year by 13.37 percent to 290.22 points, up from 255.99 points recorded in October 2017. We also observed an increase in the prices of Transport and Housing, Water, Electricity, Gas & Other".

FDC analysts however listed higher food prices, increase in retail price of diesel and currency pressure in the Investors and Exporters (I&E) window as factors that drove up inflation in October.

They stated: "The primary driver of this increase remains higher food inflation. Floods and insecurity in agrarian states of the middle belt resulted in a decline in agricultural output and an increase in the prices of commodities such as onions, pepper and melon.

"The average wholesale (depot) price of diesel increased by 2.38 percent to N215/liter in October. The retail price of diesel in Lagos is as high as N251/liter. This reflects a higher logistics cost, which could drive up the operating expenses of firms. The price of premium motor spirit (PMS) also increased across the country.

" Currency pressures at the IEFX window where transactions are now being executed at an average rate of N364 per dollar, compared to N362 to N363 per dollar in September. Currency depreciation would have a negative impact on imports."

Moderating factors

Noting that the slight appreciation of the naira in October moderated the possibility of imported inflation, FSDH analysts said: "FSDH Research's analysis indicates that in October 2018 the value of the naira appreciated at the Nigerian Autonomous Foreign Exchange (NAFEX), while it depreciated at the parallel market.

At the NAFEX market, the value of the Naira appreciated by 0.09 percent to close at N363.40 per dollar from N363.72 per dollar in the prior month. While at the parallel market the naira depreciated by 0.28 percent to close at N362 per dollar from N361 per dollar in September 2018. The appreciation recorded in the value of the naira at the NAFEX market should lower the pass through effect of imported inflation in Nigeria."

Also projecting on factors that moderated inflation during the month, FDC analysts stated: " Average on-grid power output increased by 6.77 percent to 3,752.23MWh/h. This is expected to have a positive impact on aggregate output and also reduce the demand for alternative source of energy such as diesel.

"The relative stability in exchange rate at the parallel market (N361 to N362 per dollar) could filter through to stable cost of imports. Decline in market liquidity as the average opening position of banks fell by 52.2 percent to N202.12 billion in October from N423.23 billion in the preceding month."

Dissenting views

But analysts at Vetiva Capital sounded optimistic about the inflation rate trajectory in the fourth quarter of the year, noting that the two months upward trend in inflation may not persist beyond September.

In the company's economic review for October, they stated: "Nigeria's headline annual inflation rose by 0.1 percentage points to 11.3 percent y/y in September but came in well below expectations (11.5 percent y/y) on the back of a slower month on month pace (August: 1.0 percent, September: 0.8 percent). Core inflation slowed to 9.8 percent y/y and 0.6 percent m/m, but the biggest change was in food prices. Although food inflation still rose to 13.3 percent y/y (August: 13.2 percent y/y), this was due to a weaker base from the prior year as food prices rose just 1.0 percent m/m, the slowest in five months.

"This was a pleasant surprise given our worries over intense food price pressure due to bad weather and the herdsmen crisis in the Middle Belt region. It is slightly premature, but this may indicate a positive effect of the harvest season, and if so, should persist till near the end of the year. We note that whilst the weakening inflationary pressure ought to give the Central Bank breathing room, they are unlikely to ease up current tight monetary stance amid pressure on the exchange rate."

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This positive outlook corroborated the view expressed by the Monetary Policy Committee (MPC) at its meeting in July. Though the committee expressed concern about the resurgence of inflation, it opined that impact of the harvest season will curb the potential for further increase.

According to the CBN Governor, Mr. Godwin Emefiele: "The Committee noted that disruptions to the food supply chain in major food producing states due to the combined effects of poor infrastructure, flooding and the on-going security challenges resulted in a rise in food prices,

contributing to the uptick in headline inflation. The Committee was, however, optimistic that as harvests progress in the coming months, pressure on food prices would gradually recede, while growth enhancing measures would over the medium term have some moderating impact on food prices".


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