Analysts see May 2017 inflation rate dropping on base effect, naira appreciation

Analysts at FSDH Research have projected that Nigeria’s May 2017 inflation rate (year-on-year) may drop to 16.13% from 17.24% recorded in the month of April 2017 due to base effect of abnormally high levels of inflation in prior periods arising from the increase in the pump price of premium motor spirit (PMS) in May 2016, despite the elevated consumer prices recorded in May 2017.

FSDH reckons that the sharp increase in the prices of consumer goods in May 2017 shows that inflationary pressure persists in Nigeria, and that based on the data calendar released on the National Bureau of Statistics (NBS) website, they expect the NBS to release the inflation rate for the month of May 2017 on June 15, 2017.

The base of their assumptions is the monthly Food Price Index (FPI) released Thursday by Food and Agriculture Organization (FAO), which shows that the price index rebounded in May 2017 following three months of consecutive decline.

“Our model indicates that the general price movements in the consumer goods and services in May 2017 would increase the Composite Consumer Price Index (CCPI) to 230.30 points, representing a month-on-month increase of 1.78%.

According to FSDH, the prices of tomatoes, Irish potatoes, yam, meat, rice and sweet potatoes were up by 88.16%, 36.8%, 32.42%, 4.76%, 2.54% and 0.6% respectively. Meanwhile, the prices of onions, vegetable oil, beans, garri and fish were stable.

“The movement in the prices of food items during the month resulted in 2.5% increase in our food and non-alcoholic index to 240.28 points. We also noticed increase in the prices of housing, water, electricity, gas & other fuels divisions between April 2017 and May 2017.

“We estimate that the increase in the CCPI in May 2017 would produce an inflation rate of 16.13% lower than the 17.24% recorded in April 2017, they pointed out.

The appreciation in the naira in the past months is also being projected to counter the effect of rising prices of food at the international market to certain extent.

The naira gained 0.15% and 3.66% to close at N305.40/US$ and N382/US$ at both the inter-bank and parallel market at the end of May 2017 respectively.

“This should lead to a moderation in the pass through effect of imported prices on consumer goods in Nigeria. The prices of most of the food items that FSDH Research monitored in May 2017 increased substantially, the FSDH analyst said.

In economics terms, base effect is the consequence of abnormally high or low levels of inflation in a previous month distorting headline inflation numbers for the most recent month. A base effect can make it difficult to accurately assess inflation levels over time.

Meanwhile,  FAO price index are on the upswing, except for price of maize, which remains modest due to large global supply. On the flip side, the continued fall in the price of sugar due to the weak global import demand, improved supply conditions in the main sugar producing regions in Brazil and the sudden depreciation in currency of the Brazilian Real weighed on the sugar Index

The FAO Index averaged 172.6 points, 2.19% higher than the revised value for April 2017, as all the sub-indices increased except sugar. The FAO Dairy Price Index increased by 5.15% in May, as prices for all categories of dairy products were on the increase.

Its vegetable oil price index was up by 4.74%, primarily driven by increase in both palm and soy oil prices occasioned by the rising global imports demand, low inventories and robust consumption particularly in the United States.

The prices of meat have continued to trend upward since the beginning of the year 2017. The FAO Meat Price Index was up 1.47% as prices for pig, bovine and ovine meat all increased, while those of poultry meat were stable.

The FAO cereal price index was up by 1.40%, largely on account of the increase in the prices of wheat and rice. However, the FAO sugar price index fell by 2.31% in May 2017 to a 13-month low. Our analysis indicates that the value of the Naira appreciated at both the inter-bank and parallel market.