Nigeria’s headline inflation sustained its upward trajectory for the sixth consecutive month, with the February CPI hitting 12.20 per cent year on year (y/y) from 12.13 per cent in January. It was the fastest pace of consumer price growth witnessed since April 2018. Experts, however, said the rising inflationary trend could be sustained as continued drop in oil prices, which threatens the ability of the central bank to keep defending the naira might worsen the situation. Bamidele Famoofo reports
Experts have warned that headline inflation in Nigeria in the months ahead might be bigger than what was recorded in February, when the figure rose by 7 basis points (7bps), to 12.20 percent.
The threat which the falling crude oil prices and other commodities pose on the value of the Naira, would be the reason why inflation will skyrocket as CBN may not be able to continue to defend its value in the days ahead, researchers at Cordros Capital argued.
“For the next few months, the recent precipitous decline in crude oil prices, which now questions the CBN’s ability to keep the naira range-bound, poses a fresh upside risk to both the core and food baskets, and by extension, the headline inflation”, Cordros stated.
Though experts said they would expect the apex bank to defend the naira at all cost, they are uncertain if that will be possible in the present economic situation orchestrated by the raving Covid-19 pandemic which has badly hit prices of commodities especially oil in the world market.
“We expect the CBN to explore all available options, including ‘gun-boat’ tactics, to defend the currency. However, we believe that the lack of substantial fiscal buffers and foreign investors continued aversion towards naira assets, will eventually force the CBN to re-price the currency should oil price sustain its downward spiral”, a report published by the firm disclosed.
The report stated further that: “Assuming, the border remains shut through 2020 and the proposed electricity price hike is implemented in April; we expect inflation to hit 15.89per cent in December, and average 13.21per cent over 2020FY. However, currency devaluation is now the key upside risk to our forecast. On our estimates, 10per cent devaluation will move the naira closer to its fair value.”
But the CBN’s monthly Business Expectations Survey (BES) does not agree with the position of Cordros as it said surveyed firms expect the average inflation rate in the next six months and the next twelve months to stand at 11.66 and 11.75 percent, respectively.
Border Closure Impact Wanes
According to Cordros Capital, the impact of border closure on inflation has diminished significantly as the first slower pace of price growth was witnessed in February, seven months after the closure of land borders in Africa’s biggest economy.
“Though in line with our expectations, the magnitude of the price increase was somewhat slower than our initial thoughts. Pointedly, the headline month-on-month number moderated by 8bps, the first slower pace of price growth witnessed since the announcement of the closure of the land border in August 2019. The key takeaway for us is that the initial reaction from border closure-induced price hikes appears to have dissipated. To underscore the preceding, the headline month-on-month print of 0.79per cent was 41bps below the five-year historical average for the month of February, supporting the view that the impact of tighter market supply, occasioned by the border closure, has thinned out.”
Review
Food inflation notched higher to 14.90per cent in the review period, owing to an unfavourable base from the prior year. According to the National Bureau of Statistics (NBS), the highest increases were recorded in the prices of bread and cereals, fish, meat, vegetables, and oils and fats. Compared with the situation in the previous month, food inflation moderated by 12bps to 0.87 percent month on month in February.
