Headline inflation is projected to decline again in August (32.42%)
The primary concern for many Nigerians today is the high cost of living. With escalating food prices, rising rent, and increased transportation costs, the average Nigerian feels the financial strain and is increasingly unable to afford basic needs. Business owners are also affected, facing the tough decision of either passing on higher costs to consumers or absorbing them, which impacts their profit margins. Policymakers are also keenly watching the hydra-headed monster and deliberating on the appropriate policy measures to keep prices stable and ease the economic hardship on the populace.
Although the halt in the 18-month upward inflationary trend in July provided some much-needed relief, there are concerns about whether this decline will continue in the coming months. Despite initial expectations of continued moderation, the resurgence of petrol queues, productivity losses, and increased PMS prices are leading analysts to revise their forecasts.
The Nigerian Bureau of Statistics is set to release its Consumer Price Index (CPI) and inflation report for August on September 15. At GDL, we forecast that headline inflation will decrease to 32.42% in August from 33.4% in July, largely due to base effects and the impact of the ongoing harvest season. However, the effect of the PMS price increase is expected to be more visible in the month-on-month data, which is projected to rise to 2.42% (annualized at 33.29%) from 2.28% (annualized at 31.05%) in July. This is because month-on-month inflation is more reflective of recent price changes. We expect the effect of the recent hike in PMS price on headline inflation to be more evident in the coming months as the base effects wane.
In August, food inflation is projected to moderate to 37.53% from 39.53% in July, largely due to the harvest. However, core inflation is expected to rise by 0.12% to 27.59%, affected by exchange rate depreciation. The Naira lost 1.85% in the parallel market in August.
Is falling inflation synonymous with falling prices?
There is a common misunderstanding between falling inflation and falling prices. While an average Nigerian had expected the drop in inflation in July to translate to lower commodity prices, it is important to understand that falling inflation and falling prices are distinct economic concepts.
Falling inflation refers to a slowdown in the rate at which prices are increasing. For example, if inflation drops from 8% to 5%, it means that prices are still rising, just at a slower pace.
In contrast, falling prices, also referred to as deflation, means that the actual prices of goods and services are decreasing. This can occur during periods of economic downturn when demand drops significantly, leading to lower prices.
Therefore, a decrease in inflation does not automatically imply a drop in prices.
Possible Policy Reactions
The MPC is scheduled to meet again on September 23/24 to assess recent economic developments and chart the path forward for monetary policy. While the decline in July inflation and the anticipated moderation in August may offer some relief, the committee would most likely take a cautious approach at the meeting as inflation risks remain elevated. We project that the committee will most likely maintain the status quo at the meeting and keep an eye on inflation trends in subsequent months.
Do you Know? Inflation has undoubtedly taken a toll on consumers' wallets and reduced the real value of investments. However, do you know that certain asset classes can help mitigate the effects of inflation on your finances and investment value, depending on your risk tolerance?
A financial expert can guide you through your investment journey. At GDL, your growth is our priority. If you have any questions or need assistance with your investment strategy, please don’t hesitate to reach out to us.
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economy
inflation