FDC ECONOMIC BULLETIN – NOVEMBER 12, 2021 [Re: Inflation to decline again in October (16.31%)]

Dear Subscriber,

The NBS has scheduled the release of the October inflation numbers for next week (November 15). Based on our time series model, headline inflation is estimated to decline again to 16.31% from 16.63% in September. The sustained disinflationary trend is primarily as a result of base year effects. The continued moderation in the official inflation rate will embolden the doves among the MPC to maintain status quo at the November meeting.

Inflation data defies market reality

While the historical inflation data has maintained a downward trend in the last 7 months, our survey of the Lagos commodity markets show that in reality, commodity prices are surging. Lagos state accounts for about 25-30% of national GDP. Hence, it is a true representation of the Nigerian economy. Currency pressures, rising global commodity prices and higher logistics costs continue to take a toll on domestic commodity prices. For instance, the price of a 12.5kg cooking gas has jumped by 191% to N10,200 (YTD), resulting in a switch to alternative energy sources such as charcoal and kerosene (cross elasticity of demand) and compounding the dilemma of higher food prices.

Inflation psychology – Beyond the forces of demand and supply

As commodity prices rise faster than wages, consumers spending patterns are being influenced by inflation psychology. This is a situation where consumers spend more quickly than they otherwise would in the belief that prices will keep rising. This is further fueling inflationary pressures. US inflation soared to its highest level in 3 decades (6.2%) while China’s inflation accelerated sharply to 1.5% from 0.7%. The spike in inflation in most advanced economies suggests that monetary policy normalization could ensue earlier than expected. A possible reversal in interest rates will push up debt service costs for developing and emerging markets like Nigeria, further stoking inflationary pressures. It will also trigger capital flow reversals in favor of the advanced economies.

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

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