The Year of the Single digit

Hello I think I last blogged in 3000BC, I’m sorry and I apologize. I was taking some exams which required unrivalled attention hence I had to suspend blogging on economic issues. With that completed I can return to trying to communicate my perception of economic issues affecting Nigeria.

…..

Yes so after nearly four and half years, Nigeria’s headline inflation returned to single digit levels again (bar a brief 2-month flirtation in 2011). As I had anticipated during my 2012 inflation review blog post, this is however largely down to significant base effects from 2012. In 2012, the 49% increase in the pump price of fuel to N97/litre drove a 2-3 percentage point increase in headline inflation in the first half of 2012 due to the transmission of these shocks to supply via transportation. As this is a one-off event, the 2013 numbers would generally compress under the weight of the larger denominator from 2012.

A brief digression to initiate the uninitiated – the inflation rate is the percentage change in the consumer price index (CPI) – an index of prices constructed using the Laspeyres price index approach of a select list of items that curiously includes narcotics. (Yes I flipped when I saw that too). There are other measures of inflation maintained elsewhere for instance in India, the wholesale price index is used and some countries use the producer price index.

Thus, the CPI index numbers for 2012 were generally inflated on account of what accountants would refer to as an extraordinary event – the partial removal of subsidy. Thus to sustain those rates in 2013, we would need an event of equal magnitude barring which the higher base of 2012 would work to compress the 2013 reading to much lower levels.

Thus commencing in January, we witnessed a 300bps contraction in headline inflation to 9% – which has been the average thus far in 2013. The May numbers released over the weekend are of similar magnitude.

Figure 1: Headline, Food and Core Inflation


Source: National Bureau of Statistics (NBS), Central Bank of Nigeria

The outlook for the rest of the year is still largely for lower inflation on account of the subsidy related base effects which will taper off in July when we expect lean season pressures – price increases on account of agricultural produce being out of harvest. However on account of the floods in 2012 which also drove increases in food prices as it occurred during the harvest season when prices of food items fall under fresh supplies.

On this issue, although, the overall headline figures have been lower, this has generally masked consistent increases reported by the NBS in the prices of grains like maize, millet and sorghum and tubers like yam and cassava. I suspect these latent pressures will surface in CPI numbers post-July 2013 before retreating during the harvest months starting September. My outlook is for 2013 mean inflation of 9.8% (+/- 20bps)

That will be all, Good to be back then my next blog post would review Q1 2013 GDP numbers.


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3 comments

  1. Ibezim Okehie · · Reply

    He’s baaaaaccccck!

    OK, I’m one of the uninitiated – a layman observer….and my observation is that these official index figures DON’T represent my experience in real life and that applies to both Nigeria and other places. For Nigeria in particular, I don’t think the CPI has captured the magnitude of food price increases I experienced from 2010 – 2012. There surely must be some bias or slant in computing the numbers? Then there’s the even worse correlation of GDP to “real life” especially in terms of its distribution among the populace. I can’t wait for your post on that.

    The naira is looking shaky lately. Will that play into inflation figures after July? Methinks it must, given that we import so much.

  2. Hi Ibezim,

    CPI numbers are estimates – they only hope to approximate what has happened. Crucially most CPI is computed using the Laspeyres Index method which has well documented problems nevertheless they provide stronger estimates of reality.

    The issue about your personal experience may be subjective because CPI figure is national and if i were to make a crude guess you probably live in a city. Now imagine if you lived in Makurdi Benue state the price of yam there is way much cheaper than if you lived in Lagos – now the NBS figure is a national average so you facing higher prices in the city and someone facing lower prices in Benue will even out. Its much more complex than this and the NBS has weights to prevent outliers from distorting the national mean but you can see it, there has to be some balance.

    On currency front, it could create some pressures but again Nigeria’s CPI basket is weighted with food prices having more than 50%. Most food items however imported that could pose upside to prices are done at the official market i.e CBN where they get the lower stable rate (1$=N155) so i dont see much pressures. Fuel imports are also financed here as well. The real inflationary pressure would appear if the CBN were to devalue the naira like they did sometime in 2009 and in 2011 i,e if they were to shift their goal post from the current 1$=N155 to say 1$=N160 in which case everything adjusts and we see this one off effect. That is a possibility that exists.

    On GDP i will try to incorporate an explanation to your question in the next blog post.

  3. Ibezim Okehie · · Reply

    I do understand the subjectivity you refer to. One has to try and get beyond that and think broadly.

    And I should have thought about official vs market rate for naira.

    I’ve also come across some arguments that attribute low inflation to lower or same prices for vastly improved technology products. I wonder if that applies to Nigeria at all. Hmmmm, that food weighting is large but appropriate, I suppose.

    Thanks, I will read up on some of the terms you mentioned here.

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