Following the unprecedented depreciation of the naira to N710 per dollar in July, Nigeria will record the inflation rate of 19.1% in July, the highest in 16 years since 2006, analysts at Financial Derivatives Company have projected.
According to the Lagos based investment firm, led by Bismarck Rewane as CEO, persistent depreciation of the naira is one of the three major forces behind the continued rise of the inflation rate in Nigeria.
The other two major forces are the sharp increase in the price of diesel to N780/litre and the impact of money supply growth to N48.8 trillion.
FDC analysts however noted that depreciation of the naira accounts for 76 per cent of the continued increase of the inflation rate in Nigeria.
Making this projections in its in its latest economic Bulletin, titled, “Re: Headline inflation set to surge again to 19.7%”, FDC said: “Based on our survey of major markets in Lagos Metropolis and econometric model, headline inflation, which measures the annual change in the general price level, is estimated to rise again to 19.7% from 18.6% in June.
“If our projection is correct, it will be the 6th consecutive monthly increase and the highest inflation rate since 2006. Month-on-month inflation, which measures current price movements, is also expected to follow a similar trend, rising by 0.02% to 1.84% (24.52% annualized)”.
Noting that inflation in Nigeria is increasing despite declining global food price index, the company said:
“Like most other economies, spiralling inflation in Nigeria have been largely attributed to the spike in global food and energy prices. Most commodities traded at record highs as a result of the Russian-Ukraine war-induced supply disruptions. For African countries, the effect was compounded by currency pressures as most advanced economies adopted a tighter monetary policy stance to contain inflation.
“However, global food prices are beginning to taper but inflation in Nigeria and other African countries have remained sticky downwards. The Food and Agriculture Organisation, FAO, global food price index fell sharply by 8.6% to 140.9 points in July, the 4th consecutive decline. All sub-indices declined, especially vegetable oils and cereals, which benefited from the Russian-Ukraine deal to resume grain exports from Black Sea ports.”
“Currency depreciation is muting the impact of declining global food prices on Nigeria’s inflation. The divergence between domestic inflation and global prices is partly because of the time lag between exogenous events and transmission into domestic prices.
“Imported inflation is a combination of high global prices and exchange rate depreciation. Even though we have begun to see global food prices declining, the impact may be limited in Nigeria by a further deterioration in the value of the naira.
“Based on our econometric model, exchange rate has had a 76% impact on the price level. Of the 8 African countries that have released their July inflation figures, 7 recorded increases while only Ethiopia posted a decline. This trend is likely to continue, posing significant threats to food security and could possibly worsen the continent’s socio-economic conditions.”
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