• With Lower February Inflation, Analysts Urge Caution in Policy Decision

After a 15-month rising streak, the consumer price index (CPI), which gauges inflation, reversed last month. The CPI stood at 17.78 per cent (year-on-year) in February, moving 0.94 per cent lower than the 18.72 per cent it recorded in January.

The National Bureau of Statistics, which released the February CPI, report last Tuesday that the decline represented the effects of slower rises in already high food and non-food prices and favourable base effects over 2016 prices. According to the agency, the price increases were recorded in all COICOP (Classification of Individual Consumption by Purpose) divisions that yield the Headline Index.

NBS pointed out that the major divisions responsible for accelerating the pace of the increase in the headline index were housing, water, electricity, gas and other fuel, education, food and alcoholic beverages, clothing and footwear, and transportation services.

On a month-on-month basis, the agency noted, the headline index increased by 1.49 per cent in February 2017, 0.48 per cent points higher from the rate of 1.01 per cent recorded in January. It stated, “The Food Index increased by 18.53 per cent (year-on-year) in February, up by 0.71 per cent points from rate recorded in January (17.82) per cent driven by increases in the prices of bread, cereals, meat, fish, potatoes, yams and other tubers and wine, while the slowest increase in food prices year on year were recorded by soft drinks, coffee, tea and cocoa.”

Analysts believe the decision of the Central Bank of Nigeria to adopt inflation targeting and not pursue growth with a view to addressing rising inflation, has paid off with the CPI achieving a lower inflation rate in February. While a school of thought believes the development signals the start of recovery from economic recession, others urge caution in taking policy decisions on the monetary tools, as the prolonged pressures are yet to abate. The general consensus, however, is that the authorities should watch the trend, with many believing inflation would continue on a downward streak.

The CBN had in July last year opted to target inflation rather than focus on growth, hence its decision to increase the monetary policy rate (MPR) to 14 per cent by 200 basis points, from 12 per cent, and later in the year the pace of inflation increase became slower than before. For instance, a month after the apex bank’s decision, inflation rose by 0.48 per cent to 17.61 per cent from 17.13 per cent in July. Before this, inflation had increased by 0.90 per cent to 16.48 per cent in June from 15.58 per cent in May. And ever since, the pace of increase has been reducing.

In welcoming the year-on-year decline in inflation rate, Director General, West African Institute for Financial and Economic Management, Professor Akpan Ekpo, pointed out that on closer examination, the month-on-month increase in the last one year had been on a slower pace.

Ekpo said, “This first time decline in 15 months points to the fact that the recession is easing. It appears that the decline in imports has reduced the impact of imported inflation on prices due to foreign exchange constraint. It follows that the pass through effect of speculation on domestic prices has been marginal.”

He advocated the need for caution because the food index increased year-on-year by 0.71 per cent, driven by increases in the prices of various food items. “It also increased on month-on-month as well. Inflation adversely affects the poor more than the rich, hence the rural CPI increase month-on-month is worrisome,” he said.

According to Ekpo, “Over all, the slight reduction in the rate of inflation is nothing to celebrate. The rate of inflation is an average measure; some prices go up while others decrease. Households and their families should not spend more than 20 per cent of their income on food and other very basic needs.”

Similarly, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, found it heart-warming that the rate of increase in general price level fell to 17.78 per cent in February 2017. According to him, “This could signal an inflexion point in inflation and also the commencement of recovery from economic recession. This could also support the argument in favour of monetary accommodation to ease the liquidity crunch and jumpstart economic activities.”

Ademola said, “The reasons for the lower inflation rate are many, with the high base rate in the corresponding period of 2016 a significant factor,” stressing, “The increase in liquidity from the implementation of capital projects and the Paris Club refund are important factors too.” In addition, he said, “The moderating exchange rate could also account for lower price increase from imported goods.”

Looking forward, the economist noted, “Due to the high inflation rate in 2016, the high base rates almost throughout the year indicate lower inflation rate expectations throughout 2017; hence the coming months would even record higher moderation in inflation rate.”

Speaking along the same line, Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, described the drop in February CPI as good news for the Nigerian economy.

He added, “We expect inflation to drop further in March because the base-year effect is waning and would wane further. It was in February last year that this ‘madness’ started.

“But in February this year, we started seeing improved foreign exchange supply and if that continues, we expect inflation to continue to decline. So, good things are happening and confidence is gradually returning to the economy.”

Ecobank Nigeria’s analyst, Kunle Ezun, who said the drop in inflation was expected, predicted that the CPI might fall to 14 per cent at the end of the year. Ezun stated, “The issue now is, how does that translate to improvement in the living conditions of Nigerians? For me, government must ensure that the power sector is fixed so that the high cost of power by firms and households is reduced.

“There is also the need to bring down the cost of transportation.”

In his own contribution, Director, Union Capital Markets Ltd, Egie Akpata, observed, “The base effect is kicking in so we could see a steady decline in year-on-year CPI going forward.”

Akpata was, however, quick to point out that the month-on-month inflation accelerated CPI and all its major indices. “So the inflation related pressures are not yet about to be a thing of the past.”

He cautioned that before reducing interest rates, the CBN, which is the monetary authority, needs to observe a few months of CPI reductions. “It is unlikely they will make a move to reduce rates at the next MPC.”

Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, attributed the moderation in the CPI largely to the base effect. To him, “The base effect would be more pronounced in May 2017 inflation because it was in May 2016 that the uptick was higher. So, if nothing significant occurs in the economy, we are going to see a drastic reduction, to maybe single digit in May 2017 inflation.”

For the Managing Director and Chief Economist, Global Research Africa, Standard Chartered Bank, Razia Khan, “We were expecting an improvement in February based on an even more pronounced base effect. Our food price indicator suggested that y/y inflation had started to decelerate.”

Going forward, Khan predicted, “Improved FX sales by the CBN and a reduced parallel market premium will help lessen price pressures. But all of this must be assessed against the growth in money supply. If the federal government remains dependent on CBN financing of its budget, that is a clear risk, still, to inflation. Even if the base effect dominates in the near term.”