With just a few days to the release of the Consumer Price Index (CPI) or inflation rate by the National Bureau of Statistics (NBS), analysts at CAPE, an economic research and consulting firm, have projected that Nigeria’s headline inflation is expected to moderate marginally to 21.84% in March, from the 21.91% rate recorded in February this year.
The analysts in the firm’s just published ‘Economic Newsletter, Volume 2, Issue 4, April 2023’ edition also predicted that food and core inflation were expected to slow to 24.21% and 18.78% respectively in the month.
They linked the key drivers of the headline inflation forecast to food prices, exchange rate, and broad money supply (M2), which contribute 5.97%, 1.94%, and 0.91% respectively.
According to the researchers, the firm’s analysis showed a robust impact of food prices and exchange rates on headline inflation in March 2023 when compared with the previous month.
The report stated: “The moderation in inflation is due to strong pull factors which are largely monetary that are dampening the heightening inflationary pressure. Key pull factors are money supply (M2), narrow money (M1), and credit to the core private sector which contributed 0.91, 0.53, and 0.45 percent respectively in moderating the speed of inflation in March 2023.
“The key drivers of the core inflation forecast were education, clothing and footwear, transportation, alcoholic beverages, and health which contributed 1.76%, 1.75%, 1.60%, 042%, and 0.17% respectively.
“The moderation in our food inflation forecast, despite the lingering impact of the flood and the war in Ukraine, was driven by a decline in the price of processed foods and seasonal harvest factors.
Additionally, the cash crunch due to the supply constraints of naira notes led to a moderation in demand as consumers had limited access to physical cash for petty consumption transactions and small-scale informal business activities that depend largely on cash transactions”, the firm added
The analysts recalled that this negatively affected traders in perishables, who were willing to sell off produce at a haircut and limit their loss. Also, traders and service providers were willing to sell at lower prices when the customer was offering physical cash.
In addition, they pointed out that the firm’s analysis established monetary policy instruments as pull factors, suggesting some level of monetary policy instruments’ potency in anchoring expectations and dampening inflation in Nigeria, while structural factors continue to remain dominant in driving inflation in Nigeria.
This is even as the researchers further maintained that the analysis also suggested that monetary policy in Nigeria might be drawing close to a point of neutrality, where it would have an ignorable impact on affecting economic activities and general price levels in the economy.
In addition, the analysts noted that a major challenge for monetary policy instrument potency remained its difficulty in directly impacting demand-side drivers of inflation, particularly household consumption patterns.
They listed the upside risks to inflation as including the burgeoning fiscal deficit; monetary financing, election, and census spending; anticipated removal of fuel subsidy, and the effect of monetary tightening in advanced economies leading to capital outflows and exacerbating exchange rate pressures as well as its pass-through to prices.
