*As headline inflation drops further
*Analysts mull investment, policy implications

By Emeka Anaeto, Babajide Komolafe, Peter Egwuatu & Yinka Kolawole

THE latest statistics released  by the National Bureau of Statistics, NBS, yesterday, is pointing to further upsurge in food inflation even as headline inflation rate declined marginally for the third consecutive month in April 2017 to 17.24 percent, from 17.26 percent recorded in March.

On a monthly basis, however, the report noted that the headline index dropped by 12 basis points (bps) to 1.60 percent in April, from 1.72 percent recorded in March. “The Consumer Price Index, CPI, which measures inflation increased by 17.24 percent (year-on-year) though at a slower pace in April 2017, 0.02 percent points lower from the rate recorded in March (17.26) percent,” NBS stated.

But the report explained that the top items that recorded the highest increases between April 2016 and 2017 across all the divisions were Solid Fuels, Bread and Cereals, Meat, Liquid Fuels, Clothing materials, other articles of clothing and clothing accessories, and Fish.

Food inflation rises, institutional analysts react: Giving its analytics on the latest inflation report, economists at Cardinal Stone Finance, a Lagos based investment house, had these to say: “The substantial depreciation in Naira has been a key factor driving price increases for major staple crops. According to the USAID’s Famine Early Warning Systems Network (FEWS NET), prices of cereals (maize, millet, sorghum and rice), tubers (yam, potato and fermented cassava) and legumes (cowpea, groundnut etc.) in April were higher than in the previous month and significantly higher than prices last year.

“The Naira has depreciated 55.1% officially since June 2016 when the Central Bank of Nigeria, CBN, announced a move to a more flexible exchange rate regime. Consequently, food inflation accelerated to 19.30% YoY (March: 18.44% YoY). On a month-on-month basis however, food inflation fell to 2.04% MoM in April (March: 2.21% MoM). We gather that dry season harvests are currently underway across the country and favourable results are being recorded in most areas.

“As we had expected, imported food inflation (which is also included in Core inflation) moderated further in April, printing at 16.96% YoY (March: 18.15% YoY) and 0.85% MoM (March: 1.46% MoM). This followed from the foreign exchange interventions of the CBN that led to the significant Naira appreciation at the parallel market.”

Head, Research and Investment Advisory, SCM Limited, a subsidiary of Sterling Bank Plc, Mr. Sewa Wusu, said, “It is true, according to NBS, that while the headline inflation dropped marginally by two basis points to 17.24 per cent in April, the food inflation however soared by 86 basis points to 19.30 per cent. This is due to the impact of continued pressure on domestic food prices which is yet to respond to stability in the foreign exchange rate. The core inflation however dropped by 63  basis points to 14-75 per cent,  a reflection of high base effect and stability in the foreign exchange market. This has somewhat moderated the prices of imported food items.”

Analysts at Financial Derivatives Company (FDC), run by the renowned economist, Bismarck Rewane, however, explained the factors responsible for the below-expectation decline in inflation. They stated: “Commodity prices remain sticky downwards and this is driven by two important factors. First, corporates aim to recover losses and cuts made to profit margins sustained for months. “Although the CBN has been consistent with its injections into the FX market, prices of many goods have remained stubbornly high.

“Secondly, output growth, although recovering as seen with improved PMI numbers, remains below accelerated levels needed to force prices downwards. This is attributed to the new trend of naira illiquidity, subdued levels of capital expenditure and a still fundamentally flawed exchange rate market.”

Analysts at WSTC Services Limited, a Lagos based investment house stated: “We believe this is attributable to high base effects as well as relative stability in the FX markets. The impact of the relative stability in the FX markets was also evident in the prices of imported food items as imported inflation moderated YoY by 115 bps between March and April 2017.

Continued upward pressure

“However, Food inflation surged to a year high of 19.30 per cent on account of continued upward pressure on locally produced food items. The Food sub index spiked by 87 basis points to 19.30 per cent in April 2017 from 18.44 per cent in March 2017. The NBS Food price watch also revealed that food prices increased YoY in April 2017 by an average of 33 per cent, with strong double-digit price increase recorded across all food items. However, Month-on-Month (MoM), Food prices declined in April by an average of 95 basis points.”

Other analysts’ comments

Speaking to Vanguard on the inflation report, Managing Director/CEO, APT Securities and Fund Limited, Mr. Kasmu Kurfi, said the moderation in headline inflation was “as a result of the FGN effort to bring USD exchange rate to below N400 as well as the other policy that allows access to foreign exchange as is done to Small Medium Scales, SMEs.” He added: “The CBN should reduce MPR and the TBS rate will reduce the inflation to further low or single digit.”

However, Mr. Kunle Ezun, research analyst at Ecobank Nigeria Plc, described the new inflation figure as disappointing. Speaking to Vanguard on the inflation figures he stated: “The 0.02 percentage points drop is very disappointing. I believe it does not reflect the reality on the ground. The general expectation among financial market operators was that inflation will drop to something like 16.95 per cent in April. The CBN injected a lot of forex into the economy in April, which resulted into significant decline in the foreign exchange rate. This is expected to have impacted prices to go downwards and hence lower inflation rate for April.”

Policy, investment implications: Speaking on the implication of the latest inflation figures, Managing Director/CEO,  SOFUNIX Investcom and Chartered Stockbroker, Mr. Sola Oni, said, “On the effects of inflation on stock returns, there is a positive correlation between inflation and value stocks, while it is negative on growth stocks. Value stocks have current cash flow but growth stock’s cash increases over time.”

For financial analysts at FSDH Merchant Bank Limited who had earlier released a forecast of 17.11 per cent, “with the marginal decline in the inflation rate, the yields on the fixed income securities may remain high in the short-term.”

On the policy response to the inflation situation, Mr. Wusu of SCM stated: “I expect the Monetary Policy Committee, MPC, to maintain status quo at the forth coming monetary policy meeting. There is need for policy intervention to curtail the continued increase in food prices as it portends risk to the inflation outlook.

“The core inflation has somewhat responded to the recent FX intervention which is positive. However, the onus is to address the sporadic increase in food prices which was spurred initially by FX situation given the transitory impact and which I think is not a monetary phenomenon.”

Outlook, expectations

On what the future portends in the inflation horizon Wusu stated: “By and large, I expect the stability in the FX market to impact on domestic food prices in the near term.”

For analysts at WSTC the future is still hazy. They stated: “we note that the surge in food prices portends downside risks to inflation in the coming months. However, we believe the pace of increase in general prices will be tempered by high base effects in the remaining two months of first half, 2017, 2017). “Also, we believe the relative stability in the value of the Naira should, all other things being equal, feed into prices and impact positively on Inflation in the months ahead.”


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.