Culled—–Proshare

August 16, 2016/DLM Research

Background to our forecast
The headline inflation for July 2016 is expected to be released by the National Bureau of Statistics on the 31st of August 2016. Meanwhile, headline inflation for June 2016 came in at 16.48 percent, representing an increase of 90bps from 15.58 percent recorded in the preceding month. Higher electricity rates, energy prices and imported items remain key drivers of inflationary pressures seen during the month.

This represents the fifth consecutive month of a faster increase despite being weighed down by the slower rise seen in the recreation & culture, restaurant & hotels, and miscellaneous goods & services divisions (fig. 1).

However, on a month-on-month basis, the pace of price increases slowed considerably by 100bps to 1.70 percent in June 2016. The food index was higher by 15.30 percent up from 14.86 percent recorded in the previous month largely driven by imported products and other food items particularly fish, meat, bread & cereals, and fruits. Similarly, the core inflation index rose by 16.22 percent from 15.05 percent in May 2016.

We estimate an increase in headline inflation to 17.20 percent year-on- year in July 2016; up by 72bps from 16.48 percent recorded in the preceding month (fig.2).

This in our view will be primarily driven by a slower rise in the core index. Our model also shows a movement in the food and core sub-indices to 208.6points and 200.7points respectively. This translates into a food and core inflation of approximately 16.21 percent and 16.96 percent respectively in July 2016.

We maintain our position on the likelihood of upward price movements in the coming months. Rising from the July 2016 meeting, the Monetary Policy Committee voted in favour of increasing the benchmark rate by 200bps to 14.00 percent. The basis for the hike was attributed to the assertion that the apex bank lacked the instruments required to directly jumpstart growth.

Generally, this policy decision raises certain concerns on the extent of tightening that will occur in the coming months given the current commitment of the CBN to engender price stability whilst gradually achieving positive real interest rates.

In our opinion, underlying inflation drivers ( with energy prices and exchange rate pressures being significant contributors) should be targeted and addressed rather than a resort to a further increase in the monetary policy rate to curtail inflationary pressures due to structural factors. (fig.3)