Headline inflation to moderate further to 11% in July – FDC

Headline inflation is projected to continue its moderating trend in July, declining by 19bps from 11.23 percent in June to 11 percent, according to analysts at Financial Derivative Company (FDC).

In their economic bulletin released Friday, August 10, 2018, the analysts said the July inflation figure would mark the 18th consecutive monthly fall to a 29-month low.

“This apparent sustained moderation in headline inflation is partly as a result of base year effects. The macroeconomic conditions in 2017 are significantly different from the current state (2018).

“Some of the principal differences are the availability of forex and destocking of inventories. The waning of these base year effects, meaning that the conditions of the two years are becoming similar, is a reason for the projections that inflation will soon begin to increase again. The food and core sub-indices are expected to move in tandem with headline inflation,” they said.

They noted that the month-on-month (m-o-m) inflation, which is more reflective of seasonalities, is expected to decline by 19bps to 1.04 percent in July largely due to the reduction in the prices of some of the commodities in the food basket like yam, cassava (garri) and tomato, as the harvest season has commenced, adding that the trend in m-o-m inflation has shown a higher level of volatility, peaking mainly during the planting season (April-June).

“During the month of July, there were some noticeable price moderating factors which include relative improvement in power supply from 3,588MWh/h in June to 3,619MWh/h. This is expected to have a positive impact on aggregate output,” they stated.

Other factors, according to them include decline in the average wholesale (depot) diesel prices from N217/litre in June to N207/litre in July, reflecting reduction in logistics costs, which could drive down the operating expenses of firms; reduction in naira liquidity as a result of the delay in FAAC disbursement and the CBN’s mopping up exercise, evident by the fact that opening position of banks declined by 24.4 percent to N235.9bn in July; and the marginal appreciation in the parallel market exchange rate from N362/$ at the end of June to N360/$.

There was equally ample forex supply and exchange rate stability is expected to taper imported inflation.

However some of the threatening factors remained the effect of the Apapa gridlock, which could increase the inventory carrying costs and demurrage, they said.

“The sharp decline in the gradient of the inflation curve from 0.99 percent in March to 0.19 percent in July could imply that inflation is about to bottom out. Hence, a reversal in the trend is imminent.

“The implementation of the 2018 budget as well as pre-election spending would boost liquidity, thereby heightening inflationary pressures. The Central Bank of Nigeria (CBN) has indicated that it could increase interest rates in response to higher inflation ahead of the general elections in 2019,” they pointed out.