High food prices persist despite decline in core inflation in April

The food component of the consumer price index (CPI) released by the Nigeria Bureau of Statistics (NBS) inched up 0.86% in April. This was despite a marginal decline of 0.6% in core inflation for the period. Core inflation excludes transitory or temporary price volatility as in the case of some commodities such as food items and energy products, among others.

The NBS inflation report shows the food index increased in April to 19.30% from 18.44% in the previous month. The major contributors to the surge in the food basket, the report indicates, were bread and cereals, meat, fish, potatoes, yam and other tubers, milk, cheese and eggs, coffee, tea and cocoa.

Analysts at Financial Derivatives Company believe the surge could be attributable to the fact that the period coincides with the end of the crop season and as such planting season shortages have begun to manifest, which drove the increase in prices of some agricultural commodities.

However, core inflation continues to move in tandem with headline inflation. The index recorded a decline of 0.6% to 14.8% from 15.4% in March. The highest contributions to the core index were recorded in wines and spirits, clothing materials and other articles of clothing, liquid fuel, fuel and lubricants for personal transport equipment, solid fuels, audio-visual photographic and information processing equipment.

The urban and rural sub indexes moved in opposite directions. The urban index slowed to 17.62% from 18.72% in the previous month while the rural index increased to 16.69% from 16.47% in March

On the other hand, headline inflation, a measure of the total inflation within an economy, including commodities such as food and energy prices (including oil and gas), which tend to be much more volatile and prone to inflationary spikes, once again declined for the third consecutive month, albeit marginally by 0.02% to 17.24% in April. This marginal decline in the inflationary rate highlights the fact that the effect of base year effects is waning.

Analysts see as a welcome development the decline in the month-on-month inflation rate to 1.60% (20.89% when annualized) from 1.72% in March.

Commodity prices remain sticky downwards and this is driven by two important factors. Firstly, 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.

FDC analysts believe that waning base year effects is losing its potency in steering inflation trajectory and as such the month of May is to be driven solely by supply and demand side factors.

On the outcome of the Monetary Policy Committee meeting coming up next week, FDC anticipates that a status quo on monetary parameters will be sustained. This is because, according to its analysts, inflationary pressures persist in spite of the sustained decline in year- on-year inflation.

“The planting season is still in play; the effect of policy-induced shortages on some key commodities continues to linger (as in the cases of beans and rice). The Ramadan fast will commence soon and we expect food prices to also increase,” it stated.

They also expect budgetary disbursement to have demand-pull effect on consumer prices following budgetary disbursements when the 2017 budget is given accent.

By Business a.m. live staff