FDC ECONOMIC BULLETIN – JANUARY 15, 2021 (Re: Inflation spikes despite harvest & land border re-opening)

Dear Subscriber,

Nigeria’s headline inflation quickened to 15.75% in December 2020, much higher than analyst expectations and 0.86% above the November rate (14.89%). More disturbing is the 0.32% increase in core inflation (inflation less seasonalities) to 11.37%, indicating that the spike in inflation was not driven by seasonal factors alone. It confirms the notion that the rising inflation is as a result of a combination of factors rather than any primary source – the pass through effect of the exchange rate, higher logistics costs (PMS), electricity tariff hike among others. High powered money and the funding of the FG overdraft estimated at N11trn are also inflation stoking factors. However, the relatively stable month-on-month inflation rate (1.6% – annualized at 21.11%) suggests that the spike in the annual price level is partly driven by base year effects.

The continued spike in inflation will be a major issue at the MPC meeting later this month. The CBN cannot be oblivious to a rate of inflation, which is now almost 7% above the upper limit of its inflation target range (6-9%). It therefore may consider tightening before the meeting or symbolically increasing the rates of its special bills (currently at 0.5%p.a). The naira had wobbled throughout 2020, partly as a result of a gaping difference between the rate of inflation of 15.75% and basement level rate of 0.5% p.a. on 91-day treasury bills.

The FGN has also announced plans to securitize its overdraft at the CBN roughly estimated at N11trn (30.14% of money supply). This will increase available securities in the market and automatically push interest rates higher.

In the publication, the FDC Think Tank shares its thoughts on the impact of December’s inflation numbers on the economy.

Enjoy your read…