By Peter Egwuatu
Nigeria’s headline inflation is expected to show a drop to 11.35 percent in the January, 2019 reading, down from 11.44 percent in the preceding month, according to a forecast by Financial Derivative Company, FDC.
The FDC explained that this is likely to be a reflection of a fall in disposable income in January, leading to a decline in aggregate demand for consumer goods.
“The pattern of slow demand early in the year is seasonal and is empirically validated. In recent times, January inflation numbers have declined, as shown in the graph below. This validates that the assertion in personal income compression in January is partly because of the payment of school bills and the post Christmas expenditure effect.
“The moderation in the headline inflation would come as a relief to policymakers who are concerned that inflation will continue its upward movement which started in November. Notwithstanding, the inflation number is still a mile away from the CBN’s comfort zone of 6-9 percent.”
On Month-on-Month, MoM price index down, FDC said: “The MoM inflation (which is more reflective of current prices) is projected to decline to 0.72 percent (8.96 percent annualized) from 0.74 percent (9.31 percent annualized) in December 2018. This we believe will be driven by the fall in the prices of the food basket. The most significant is the sharp drop in the price of onions which declined to N18, 000 per sack after staying stubbornly high at above N30,000 per sack for five months.”
On the exchange, rate, FDC stated that the exchange rate appreciated across all segments of the foreign exchange market in January. The naira gained 0.28 percent at the parallel market to close the review period at N361/$. Similarly, the interbank and IEFX rates appreciated by 0.07 percent and 0.38 percent to end the month at N306.75/$ and N363.03/$ respectively. The appreciation in the currency was partly due to increased CBN forex intervention. Total forex sales was up 40.8 percent to $1.18billion in January. Given Nigeria’s high marginal propensity to import (MPI) of approximately 70 percent, an exchange rate appreciation would reduce import costs and lower imported inflation. This is positive for firms’ production costs and margins –particularly in the manufacturing sector.
Commenting on the outlook for the economy, FDC stated: “The moderation in the headline inflation is expected to be short-lived as the boost in liquidity stemming from the minimum wage implementation and election related spending would increase aggregate spending and push up prices.
“In addition, the mobile payment launch by the mobile network operators would enhance efficiency in the payment system and increase the velocity of money in circulation. However, this could increase money supply and weigh on the general price level.”