Has CBN Finally Tamed Inflation?

With a downward trajectory in recent months, the Central Bank of Nigeria may have curtailed the rising inflation, which had threatened the key macroeconomic conditions, writes James Emejo

The consumer price index (CPI), which gauges the rate of inflation, further dropped to 11.25 per cent (year-on-year) in March 2019, compared to the 11.31 per cent recorded in February.

The National Bureau of Statistics (NBS), in its March CPI report noted that the 0.06 per cent decrease

in the headline index was reflected in all the divisions that determine inflation.

Core inflation for the month stood at 9.5 per cent, down by 0.3 per cent when compared with the 9.8 percent recorded in February while the composite food index, stood at 13.45 per cent compared to 13.47 per cent the previous month.

According to the statistical agency, the urban inflation rate dropped to 11.54 per cent (year-on-year) in March, compared to 11.59 per cent in February, while the rural inflation rate also reduced to 10.99 per cent from 11.05 per cent.

On a month-on-month basis, the urban index rose by 0.81 percent in March, up by 0.05 from 0.76 per cent recorded in February while the rural index also rose by 0.77 per cent in March, up by 0.06 per cent from the 0.71 per cent rate recorded in February.

Specifically, the slow rise in the food index was attributed to the muted increases in prices of bread and cereals, meat, fish, potatoes, yam and other tubers, oils and fats, and soft drinks, vegetables, and fruits.

On month-on-month basis, the food sub-index increased by 0.88 per cent in March 2019, up by 0.06 per cent points from 0.82 per cent recorded in February 2019.

According to the NBS, the average annual rate of change of the food sub-index for the twelve-month period ending March 2019 over the previous 12-month average was 13.42 per cent, 0.20 per cent points from the average annual rate of change recorded in February 2019 (13.62) per cent.

However, on a month-on-month basis, the core sub-index increased by 0.53 per cent in March, down by 0.12 per cent when compared with 0.65 per cent recorded in February.

The highest increases were recorded in prices of domestic and household services, tobacco, actual and imputed rent for housing, dental, medical and hospital services, tobacco and major household appliances.

It was not surprising that the decline in headline index impacted positively on the prices of some consumer items within the month.

For instance, the average price per litre paid by consumers for National Household Kerosene decreased by -0.49 per cent month-on-month and increased by 12.99 per cent year-on-year to N303.94 in March from N305.44 in February.

According to the National Household Kerosene Price Watch March 2018, states with the highest average price per litre of kerosene were Anambra N329.09, Ebonyi N326.83, and Ondo N326.67.

Those with the lowest average price per litre of kerosene were Gombe N255.38, Niger N278.02 and Kaduna N279.75.

Also, average price per gallon paid by consumers for kerosene decreased by -1.56 per cent month-on-month and increased by 26.25 per cent year-on-year to N1190.89 in March 2019 from N1209.73 in February 2019.

Furthermore, the average price for the refilling of a 5kg cylinder for Liquefied Petroleum Gas (cooking gas) decreased by -0.16 per cent month-on-month and -1.25 per cent year-on-year to N2,064.45 in March from N2,067.68 in February.

According to the Liquefied Petroleum Gas (Cooking Gas) Price Watch, states with the highest average price for the refilling of a 5kg cylinder for cooking gas include Bauchi (N2,500.00), Cross River N2,400.00 and Adamawa N2,375.00 while those with the lowest average price for the refilling of a 5kg cylinder for cooking gas were Kaduna N1,740.17, Enugu N1,769.23 and Osun N1,785.29.

Essentially, the recent decline in inflation has caused some excitement in the market especially the CBN which had been battling to contain the rising prices and stabilise the exchange rate.

Notably, inflation resumed its descent in January 2019 when it dropped to 11.37 per cent from 11.44 per cent in December in 2018.

The headline index further reduced to 11.31 per cent in February and 11.25 per cent in March.

One of the major concerns around high inflation had been its benign effect on both monetary and fiscal policy and the economy in general.

Writing in the European Journal of Business and Management, on the “Assessment of the Effect of Inflation on Nigeria’s Economic Growth: Vector Error Correction Model Approach”, in their 2017 piece, Eze Onyebuchi Michael and Nweke Abraham Mbam of the Department of Economics, Ebonyi State University, Abakaliki, had further established that inflation affected Nigeria’s economic growth negatively and insignificantly.

According to them: “Generally, high inflation imposes welfare costs on a nation, hinders efficient allocation of resources by affecting the role of changes in the relative price level, and as well discourages investments and savings in an economy as it creates unpredictable future prices.

“The situation also affects financial development because it makes financial intermediation more costly, and the poor are mostly affected because they rescind in holding financial assets that provides a hedge against high inflation and decreases a country’s international competitiveness by making exports more expensive.

“ It also has negative effect on payments balance, and reduces long-term growth of a country. Business and households perform poorly during the period of high inflation.”

There is no gainsaying the fact that the CBN had in recent times reeled out an array of intervention programmes to tame inflation and restrict it to a single-digit target of between six to nine per cent this year in order to stabilise exchange rate, which had been under undue pressure from mainly oil price volatility in recent times.

The apex bank’s efforts appeared to have yielded fruits, by the recent consecutive monthly decline, eventually allowing the bank a rare opportunity to tinker with the monetary policy rate (interest rate) which was reduced by 50 basis points recently to the excitement of the markets.

The adjustment in MPR finally came after holding the rate at 14 per cent for about two years, largely due to inflation as the former rate cannot go below the latter rate.

Nonetheless, analysts have expressed cautious optimism over the downward trajectory in inflation.

A credible source told THISDAY that though the decline in the March index was a positive indication for the economy, vulnerability of oil price shocks for an import dependent economy such as Nigeria posed a challenge.

He said: “It’s positive news that the trajectory of inflation has been heading downward consistently over the last few months. Even MPC decision to reduce the MPR has not in any way turned effective interest rate to negative which is positive as portfolio investments will remain profitable to that extent.

“A signal for supporting growth is now sent to the market by MPC and this will be further supported by reducing inflation rate and improving foreign reserve to over $44 billion. However, vulnerability of oil price shocks for an import dependent economy like Nigeria implies that, any downward change in oil price will easily put pressure on our foreign exchange reserve and further trigger imported, cost push inflation.

“Walking the talk of ensuring economic diversification and dealing with the fuel subsidy issue is the key to sustainable growth and development of the economy.”

Also, commenting on the inflation numbers, Research Analysts at FXTM, Lukman Otunuga, said it was a favourable development, considering that there had been speculation of increased government spending stoking inflationary pressure.

He said:“With consumer prices moderating closer towards the Central Bank of Nigeria’s target band of six to nine per cent, this may open the doors for the central bank to make a move in the future.

“While it remains premature to speculate on the possibility of another rate cut occurring anytime soon following the surprise move in March, repeated signs of easing inflationary pressures could prompt the CBN to cut rates again during the second half of 2019.”

Also, analysts at Cordos Securities Limited, said there appeared to be no risk to the headline index for the rest of the year.

It noted that looking ahead, whilst the still elevated diesel price should have ordinarily driven month-on-month food inflation higher in April, they expect a ramp up of output in April off season harvest by Nigerian farmers would cap higher transport cost pass-through to food prices.

According to the investment analysts: “That, together with a stronger naira, which continues to discourage cross-border demand from neighbouring countries, informs our sanguine view on food prices. Thus, we expect month-on-month food inflation to moderate slightly in April.

“Elsewhere, despite the fuel scarcity which greeted the month of April across key segments of the federation, we remain largely confident of a subdued month-on-month core inflation reading in the near term.”

However, analysts at Cowry Assets Management Limited said: “We expect inflation rate to rise in the months of April, May and June amid Easter and Ramadan festivities plus ongoing planting season. Also, the eventual signing of the new minimum wage bill will also push headline inflation higher going forward.”

Nonetheless, Michael and Mbam further observed that “while government economic measures aimed at improving public spending on both private and public investments leads to increase real GDP, such measure does not lead to solving Nigeria’s inflation problems.”

Rather, they urged government to “reconsider the over reliance in its spending on public and private investments in solving inflation problems in Nigeria, as there are other factors responsible for high inflation in the economy.”

“Similarly, government is advised to pursue

vigorously the economic policies targeted at improving economic growth because that will help to reduce high inflation in the economy,” they added.