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Nigerians Refuse to Hold Breadth as Inflation Downs to 17.93%

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Nigerians are not holding there breadth as Nigeria’s May 2021 inflation numbers suggest that the domestic consumer price index (CPI) has risen at a slower pace. The headline inflation number released by the National Bureau of Statistics (NBS) shows that inflation for the month of May 2021 settled at 17.93%, this was 0.19% lower than the 18.12% of the previous month of April.

The new headline inflation figure took analysts by surprise as most economists had expected the number to reverse the decline between March and April 2021 based on concerns over slow domestic supply chain recoveries and persistent security concerns in the countrys farm belts of Plateau, Benue and Taraba states.

The troubles of the food production belt has seen a steady month-on-month increase in the cost of food and a reduction in consumers’ real disposable incomes. May 2021 data, however, suggest that food pains are gradually abating.

Food Inflation- When the Stomach Grumbles

According to the data released by NBS, Food Inflation for the month of May was estimated at 22.28 % this was 44 basis points lower than the food inflation rate for the month of April. This shows that the CPI, the average price of a selected basket of commodities, was 22.8% higher in May 2021 than it was at the same period in 2009 the data’s base year. A look at the month-on-month data, the food inflation index rose by 1.05% in May. The 12-month period to May 2021, saw a 0.6% rise in the average annual rate of change of the index from 18.58% in April to 19.18% in May 2021.

The highest increase in the food index was seen in Bread and Cereals, Fish, fruits, vegetables, Poultry products, Meat, and Beverages (see chart 1 below).

Core Inflation- Without Food Inflation Goes Up

The year-on-year (Y-o-Y) analysis of the prices of all items apart from farm produce reveals that Prices rose by 13.15% in May 2021 which corresponds to a 0.41% increase when compared to April 2021.

However, month on month the core inflation index increased by 1.24 percent in May as against a 0.99% increase recorded in April 2021.

The average annual rate of change of the core inflation index for the month of May was 11.5% which is 0.25% higher than the index for April.

The highest increases in this sub-index were recorded Healthcare services, shoes, carpets pharmaceutical products hairdressing cooking gas, and garments (see chart 2

May Inflation Rates-How the States Stacked Up

Deeper review of the May 2021 CPI data shows that across the 36 states, the three states that saw the sharpest rise in prices were, Kogi State with an inflation rate of 25.13% Y-o-Y, Bauchi State with an inflation rate of 23.02% Y-o-Y and Sokoto State with an inflation rate of 20.11%. On the other hand, Imo State and Delta State saw the lowest Y-o-Y rates of 15.52% and 14.85% respectively (see chart 3 & 4 below).

Urban-Rural Inflation: Handshakes Across Communities

Considering the inflation figures for May, the Urban index rose Y-o-Y by 18.51%, down from 18.68% in April 2021, the Rural index, on the other hand, rose by 17.36% Y-o-Y in May from 17.57% in April 2021.

Major Driver

Many Economists had anticipated higher monthly inflation rates. We, therefore, have inflation rates lower than expected and this can be attributed majorly to:

High Base Rate effect

Given that the price index had risen at a high rate in the corresponding period of last year when the CPI increased between May 2019 and May 2020 from 286.6 to 322.2 thereby recording an inflation rate of 12.4%, even an equal increase in the price index between May 2021 can only yield a lower inflation rate.

Thinking Foward

Relying on the May 2021 inflation rate data, households sjould heave a sigh of relief as purchasing power (how much a naira note can buy in local markets) would have defied analysts morbid projections for the month, but with supply chains still fragile and insecurity across geopolitical zones worsening, the recent inflation rate numbers are flaky. The inability to reestablish food supply chains and other supply networks indicates that the reprieve from rising food inflation is only temporary and that even core inflation may see an upward reversal as other items in the CPI basket rise on the back of rising international oil prices (recent Brent oil price rose to US$73 per barrel) and a likely upward adjustment in the domestic cost of white oils such as petrol (PMS), diesel (AGO) and kerosene (DPK) between June and August 2021.

Analysts believe that the Central Bank of Nigeria (CBN) will wait to see June inflation figures before considering a policy reset to tighten money supply to reduce inflation rate. The forseeable attempt at reeling in inflation by Q3 2021 could lead to a rise in money market rates and a fall in fixed income asset prices. If Inflation rises in June 2021 fixed income investors may decide to go short as bond prices tumble. Money market rates may rise in H2 2021 if CBN’s money supply causes rates to go up and hurts manufacturing sectors finance costs meaning that highly geared companies could see share prices taking a dip. If inflation rate, however, falls again in June the CBN may decide to hold policy rates constant as the scenario would indicate a situation where inflation heads towards the International Monetary Fund’s (IMF’s) projection of 16% per annum for 2021

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