Inflation rate quickens to 48-month high…

On the back of surging food prices, Nigeria’s February inflation rate accelerated by 17.33 percent, a 0.86 percent point increase from 16.47 percent in January 2021, according to a report released by the National Bureau of Statistics.

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From BusinessDay analysis, inflation rate has been rising for 18 straight months and it is at the highest in 48 months.

The report showed that inflation rose month-on-month by 1.54 percent, which is 0.05 percentage points higher than 1.49 percent recorded in January.

Food inflation rose by 21.79 percent month-on-month compared to 20.57 percent in January 2021.

The major drivers of the rise in Nigeria’s food index are bread, cereal, meat, fruits, vegetables, oil & fat, potatoes, fish, yam and other tubers.

Core inflation, which excludes the prices of volatile agricultural produce stood at 12.38 percent month-on-month, up 0.53 percent compared to 11.85 percent in January 2021.



Inflation Expected to Spike Further

Economic data inflation continued to be mixed and driven by the impact of lockdowns in different countries.

U.S. initial jobless claims rose early in February, but fell back later in the month, with retail spending increasing the most in almost half a year.

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UK retail spending saw its largest drop since spring of 2020 due to the lockdown, but forward-looking PMI indicators skewed surprisingly to the upside. In Q4 2020, U.S. GDP recorded a solid growth of 4.1%, while the U.K.’s GDP growth was also positive at 1.0%. However, the Eurozone contracted by -0.6%.

Among major developed countries, the UK continued to lead on vaccine roll-out, with a majority of the most vulnerable population having received their first shot by the end of February 2021.

The US was catching up fast, while the EU remained far behind. Interestingly, new studies provided evidence of high levels of protection against severe cases after just a single dose of the vaccine.

Global COVID-19 cases saw a massive decline over the month, which led to tentative easing of restrictions in some U.S. states, while the UK announced a cautious phased-in reopening plan starting in March 2021. Likewise, Japan started to lift the state of emergency in some prefectures.

The U.S. experienced devastating winter storms that led to power outages in several states, most notably in Texas, and these negatively impacted economic activity in these states.

A global shortage in semiconductors exacerbated disruptions in the U.S. manufacturing sector.

A protectionist stance by President Biden who kept tariffs on aluminum from the United Arab Emirates added to the supply chain worries, but a U.K. push to join trade agreements such as Trans-Pacific Partnership successor was encouraging for global trade.

In other news, renewed political turmoil in Italy ended with Mario Draghi being appointed as the new Prime Minister.

Monetary policy in the U.S. remained unchanged, apart from Central Bank’s commitment to continue to provide support for the recovery.

The $1.9 trillion fiscal stimulus package was passed by the Senate despite fears of throwing more borrowed money at an economy that is expected to be running hot in summer. The proposed federal minimum wage increase seems increasingly less likely to be passed by the Senate, after the parliamentarians ruled that it cannot be included in a budget reconciliation bill. inflation

In Nigeria, the Federal government approved a new Medium Term Debt Management Strategy for the period 2020-2023.

In line with the Debt Management Office’s previous practice, the new strategy reflects the global and local economic impact of the COVID-19 pandemic and incorporates data from the revised 2020 Appropriation Act and the Medium-Term Expenditure Framework (2021-2023).

The Debt Management Office also hinted at the possibility of exploring funding from the Eurobond market.

However, this will only be done after all the other concessionary sources have been exhausted. Also, in the month under review, Nigeria established its infrastructure company, InfraCo. The board of InfraCo will be chaired by the Governor, Central Bank of Nigeria (CBN) and will include the Managing Director, Nigeria Sovereign Investment Authority (NSIA); President, Africa Finance Corporation (AFC); representatives of the Nigerian Governors Forum; Ministry of Finance, Budgets and National Planning, and 3 independent directors from the private sector.




Inflation: February Headline May Jump To 17.27%

We are estimating a sharper increase in headline inflation to 17.27% for February 2021 up from 16.47% in January. If this happens, it will be the 18th consecutive monthly increase in Nigeria’s inflation rate. It will also be the highest level in 46-months.

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Inflation is moving further away from the upper band of the CBN’s 6- 9% target. It is likely to impede output growth. Real GDP growth increased marginally by 0.11% in Q4’20 after two consecutive quarters of negative growth.

In the last two months, we have seen a divergence between the direction of month-on-month and annual inflation due to the base year effects and supply shocks. The month-on-month inflation is estimated to remain relatively flat at 1.49% (19.47% annualized) in February.

We have also seen the impact of high- powered money and the massive borrowing of the FGN via the CBN. The impact of the crowding out of private investors from the public debt market by the CBN printing money is now playing out in higher price inflation.

Food and core sub-indices to increase

We expect the food and core sub-indices to move in tandem with the headline inflation. Food price pressures will remain the primary driver of inflation, rising to 21.98% in February. The impact of the recent blockade of food supply from the Northern states to the south-west is unlikely to reflect in the February inflation numbers.

However, the impact will be felt in the month of March. Core inflation (inflation fewer seasonalities) is also projected to cross the 12% threshold to 12.02% in February due to exchange rate pressures and higher logistics costs. The impact of higher transport fares will be more potent in March.

Inflation expectations more to the upside: Tighter monetary policy stance likely in H2’21

Expectations, which is the basis for policy formulation is more to the upside due to supply shocks emanating from the food blockade and heightened insecurity, exchange rate pass-through effect and higher energy and logistics costs.

Recently, the naira has been allowed to crawl up to N411.63/$ at the I&E window, whilst hovering around N480- N482/$ at the parallel market. This coupled with the periodic dilemma on the adjustment of PMS price will continue to increase production costs and push up commodity prices.

The persistent rise in inflation increases the chances of a tighter monetary policy stance albeit in H2’21. The CBN has indicated that it is unlikely to change its accommodative stance in the near term.

The MPC committee will continue to monitor the impact of recent policies and stimulus on economic growth while using orthodox tools to mop up liquidity and contain inflationary pressures.