FDC ECONOMIC BULLETIN – JULY 13, 2021 (Re: Headline inflation likely to creep back up in June)

Dear Subscriber,

Headline inflation is expected to accelerate to 18.1% when the June inflation data is released on Thursday by the NBS.  If this happens, it will represent a point of inflection after two consecutive months of moderation from 18.17 to 17.93%. Month on month inflation is also expected to jump to 1.36% (annualized 17.61%) while the food basket will rise to 23.4%.  Core inflation which excludes the often volatile categories of food and energy will increase to 13.6% from 13.15% in May.  The question on the lips of analysts is likely to be “Why this reversal of trend?

Why the reversal??

Whilst some analysts expressed skepticism as to the sustainability of the trend, our understanding of the change in direction is because the base year effects of 2020 have since waned and that a new impetus of price momentum is at play again.  For example, it was only on May 24th that the CBN moved on the exchange rate adjustment from N379/$to N411/$ at the IE window.  In the parallel market, the Naira fell by 3.9% to N505/$ because there was not a corresponding increase in forex supply to the market.  The impact of the currency pass through to domestic prices only began in June and July.

In addition, the price of diesel, the principal fuel for logistics and distribution spiked 23.95% to N295 per litre.  These factors were mainly responsible for pushing both food and other prices against the expected direction.

Investor & Market Reaction

If the NBS announces an increase in inflation, investors and the market would not be surprised and will take it in stride.  This is because the markets were just as surprised as analysts when inflation supposedly moderated.  The stock market which technically has an inverse relationship with interest rates has already lost 2.04% since June.  This is because investors have already priced in an increase in the general level of interest rates.  The real estate market where vacancy factors are on the increase is not any different.

Will an increase inflation persuade the MPC to move??

A one month increase in the inflation rate is unlikely to force the hand of the committee meeting in 2 weeks time to make any change.  They are more likely to adopt a wait and see approach this time around.

In the download, the FDC Think Tank shares its estimates for June inflation and likely policy reactions.

Do enjoy your read…….