Based on our market survey and regression, headline inflation is projected to moderate further to 16.8% in August from its current level of 17.38%. The easing of inflationary pressures is likely to be partially due to price resistance by income weary consumers and increased supply of food commodities as a result of the harvest season. Our projections also point towards an increase in core inflation to 13.9% in August. Even though inflation would have declined for five consecutive months, there is a probability that food and headline inflation could spike in September again due to a sharp depreciation of the naira in the parallel market.
Manufacturers claim that they are able to source only 20% of their needs from the I&E window. The blended rate has dropped by 5.02% to N506.2/$. This view is borne from the fact that the price of onions, tomatoes, plantain, and yam fell by an average of 18.43% whilst the price of commodities with import content such as flour, sugar, semovita and noodles spiked by approximately 8.70%. The imported commodities are relatively price inelastic because of the lack of perfect substitutes. Also, as we approach the Christmas season, we might begin to see a hike in the price of rice, chicken and turkey.
MPC could cut the MPR by 50bps to 11.0%p.a.
The MPC is scheduled to meet this month. A continued moderation in inflation and the surge in Q2 GDP growth (5.01%) albeit due to base year effects will increase the probability of empowering the doves in the MPC to fight for a reduction in the MPR as a complement to the stimulus of the fiscal authorities to sustain the growth trajectory. However, indicators are pointing towards real GDP growth tapering in Q3. The Stanbic PMI reading, which is a forward-looking indicator fell by 5.78% to 52.2 points in August. If inflation also reverses its downward trend in September due to persistent currency pressures, the MPC may be put on the spot and will have to make a hard choice.
In the download below, the FDC Think Tank shares its estimates for August inflation and likely policy reactions.
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