“Also, the current rate of food inflation is unsustainably high. At the current rate, food prices will continue to double every five years. High food prices or inflation is a critical cause of poverty as the poor are increasingly vulnerable and unable to afford food and other basic amenities”.
The National Bureau of Statistics (NBS) on Tuesday published the July Inflation data, which showed that inflation rose by 17.38% y/y, down by 37 basis points from 17.75% recorded in June 2021. This is the third consecutive decline in the year-on-year inflation figure, after climbing for 19 consecutive months to a more than 2-year high of 18.75% in March 2021.
Month-on-month, inflation rose by 0.93% which is its lowest increase in the last 15 months and indicates lesser pressure on price level in the month of July. This also means that general price level rose the weakest in July in over a year.
In April 2021 headline inflation had made the first reverse after a 19-month consecutive rise.
For inflation sub-indexes, core inflation rose by 13.72% y/y in July (from 13.09% in June 2021), while food inflation increased by 21.03 y/y (from 21.83% in June 2021). Core inflation increased by 63 basis points year-on-year and 49 basis points month-on-month, while food inflation fell by 80 basis points year-on-year and 25 basis points month-on-month. This shows that core inflation was the main driver of inflation in July.
A cursory look at the sub-constituents of the core inflation basket shows broad based pressures. Clothing & Footwear rose by 14.20% y/y in July (from 13.86% previously), Utilities by 10.20% (from 10.21% in June), Household furnishing by 13.57% (against 13.25% in June), Restaurant & Hotels by 2.18% (from 11.98% in June) and Education by 11.81% (versus 1.58% in June).
Earlier, analysts at Cardinalstone Partners stated that electricity costs would add to inflationary pressures from July 2021 following the NERC scheduled increase in electricity tariffs from July 1. Electricity consumers had been pre-informed about new electricity tariff that is expected to take effect from second quarter of the year.
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For food inflation, whilst the index remains high, the month-on-month and year-on-year decline in the index is a positive development. Analysts attribute the weaker outturn to weaker base effects and the impact of early food harvest.
Still too High
Whilst inflationary trend continues to decline, the high rate of inflation at 17.38% y/y has implications for the Nigerian economy. One of such is that the real interest rate in the country is negative. This means that the average return on an annualised investment in treasury risk free instruments will yield a negative real return. For context, the average yield on 1-year instruments is 7.94%, compared to inflation in July at 17.38%. This implies a real return of -9.44%
Also, the current rate of food inflation is unsustainably high. At the current rate, food prices will continue to double every five years. High food prices or inflation is a critical cause of poverty as the poor are increasingly vulnerable and unable to afford food and other basic amenities.
The core mandate of monetary policy should be focused on reducing inflation in the country. The Central Bank of Nigeria (CBN) is in charge of monetary policy and persistently high inflation indicates a failure of the apex bank at this core mandate.
Over the coming months, the outlook for a continued deceleration in inflation is mixed due to certain factors. Analysts expect five factors to continue to drive inflation: (1) introduction of the federal government new policy on road tolls, (2) higher electricity prices on utilities sub-basket (3) harvest season which should get into full swing from end of August 2021, (4) base effects from the comparably lower CPI basket in the prior year, and (5) likely unrest in the Naija Delta due to the controversial reduction in host communities’ allocation to 3% (from 10%) as stated in the recently signed Petroleum Industry Act (PIA).
