Latest Inflation rate is a smokescreen and this is why
The National Bureau of Statistics announced on Thursday that Nigeria’s inflation rate for the month of May 2017 was 16.25% the lowest since May 2016 when we recorded an inflation rate of 15.58%. This also represents the fourth consecutive drop in inflation rate in the country. Despite this drop, we believe drop in inflation rate may be short-lived as prices are expected to rise further in the coming months.
The major reason attributed for the drop in inflation rate over the last few months has been the impact of base effects. Inflation rates are calculated by subtracting the cumulative prices of items in a period in an earlier year from the same period in the current year. If the base from the prior period is significantly higher than the base in the corresponding current period, inflation rate increases rapidly.
This was the case in February 2016 after the increase in electricity prices. The in March 2016 was 197 a significant increase from the base of 169.5 same period in 2015. That rise in May 2016 increased the base which has masked the increase in prices in recent month despite a higher base a year later. The month on month inflation rate points to this.
A sign that inflation rate might be increasing or reducing from year to year is dependent on what happens with month on month inflation. A faster month on month inflation rate is often a clear sign of a predictable higher base in the coming months. A look at the NBS data suggest, month on month inflation has been rising.
Month on month inflation
The all items index which measures core inflation and food inflation shows month on month inflation rate has risen at least above 1% since January 2017. In fact, it was 1.88% in May 2017 and is likely to cross 2% in June. In fact, if month on month inflation rate rises above 2.4% in June 2016, inflation rate could be back to 17%. While this is a remote possibility, the rise in food prices is a major concern.
As reported last month on Nairametrics, the faster increased in the prices of food items across the country has been a source of worry for Nigerians. According to data from the NBS May food inflation rose by 19.27% year on year, slightly lower than the 19.3% rise in April 2017. This in no way suggest food prices are starting to drop as month on month food price inflation for may was about 2.5%, the highest we have seen since May 2016, when it was 2.6%.
The rising rate of inflation in the food segment has led some analysts to believe that Nigeria might be facing a food crisis if we are to miss a bumper harvest between August – September. The Bureau confirms, the rise in the index was caused by increases in prices of meat, bread and cereals, fish, potatoes, milk cheese and eggs as well as vegetables such as tomatoes. Nairametrics data also reveal tomato prices have also increased nearly 4 folds over the last few months. Despite the billions poured into ensuring Nigeria is self sustainable in feeding itself, it appears the efforts of the government is being thwarted by other issues synonymous with the value chain. Farmers have complained of pest related issues, increase in transportation cost, wastage as a result of storage limitations as reasons why food prices continue to rise.