Dear Subscriber,
After seven consecutive months of decline and one increase last month, Nigeria’s official headline inflation is likely to rise again when the data is released next week (February 15). Our econometric model and Lagos price survey indicate a 0.23% increase to 15.86%. If this projection is accurate, it means Nigerian inflation will be moving in tandem with global trend. US inflation, which was released today showed another spike to 7.5% (highest inflation rate in 41 years). It is now almost imminent that the US Fed will hike interest rates by 50 basis points next month.
In Nigeria, one of the major causative factors of inflation in this period is the depreciated naira pass-through into domestic prices. This is having a cross elasticity effect on local substitutes. This means that an increase in the price of imported commodities will lead to a proportionate increase in the prices of domestic substitutes. The second major factor is the effect of excess naira liquidity and lower interest rates on the general level of prices. This could further put pressure on the currency.
What goes up must come down – Will this hold for Nigeria?
Newton’s law of gravity states that what goes up must come down. Nigerian inflation had defied this logic for the better part of 2020-21. Inflation expectations are tilted in favour of an expected increase in price inflation. The markets had already come to accept the fact that petrol price was bound to increase in February. The delay in the implementation of this policy only led to confusion in the minds of analysts and market operators. The price of diesel spiked by 20% to N410-420/litre from N350/litre a week ago. This will drive up food transportation costs in the short-run and further threaten price stability.
In the download, the FDC Think Tank shares its estimates for January inflation and likely policy reactions.
Do enjoy your read…….