Our time series model is forecasting a spike in headline inflation to 17.8% (±0.2%). Our analysis also reveals a jump (0.51%) in food inflation to 22.3%. While rising food prices have been an acute problem in Nigeria, it is also a global phenomenon in 2021. According to the Food and Agriculture Organization (FAO), the global food price index rose by 2.1% in March, driven by strong demand for basic foodstuffs such as vegetable oils, meat and dairy. In Sub-Saharan Africa, we are also witnessing a surge in food prices happening alongside the economic recovery.
As forex scarcity bites
Exchange rate pressures have proven to be one of the principal drivers of inflation in Nigeria. Manufacturers are currently experiencing difficulties in securing imported raw materials as forex rationing continues to take its toll. The average ratio of official/autonomous forex sourced by manufacturers is now 20:80. The shortage of local substitutes is reducing supply to retail markets as aggregate output has been constrained by a number of factors including disruptions, low productivity (-0.5%) and logistics. Also, core inflation in Nigeria has become almost chronic in its rigidity (12.6%).
Interest rates increase now almost inevitable
The sharp increase in headline inflation is likely to force the CBN to reconsider resuming its tightening cycle. Typically, monetary conditions and monetary policy move in opposite directions to keep the price level under control. With inflation spiralling and currently double the upper band of the CBN’s inflation target (9%), a likely increase in interest rates is not only imminent but almost inevitable. The good news is that policy makers are becoming increasingly aware of the need to increase interest rates before inflation spirals out of control. A third of the committee members (MPC) voted for a rate hike at the MPC meeting in March. This is likely to increase towards a majority of members in the month of May.
In the download, the FDC Think Tank shares its estimates for March inflation and likely policy reactions.
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