Wednesday, April 23, 2014

November Inflation Numbers, What Significance? By Ifeanyi Uddin


Ifeanyi Uddin disagrees with official statistics saying inflation has been on the upswing all year, causing rising food prices, reducing disposable income, and hurting households’ welfare

Consumer price indices for November (released last week by the National Bureau of Statistics – NBS) confirm what every housewife/home maker in the country has known for sometime now. Rising food prices, to the extent that these reduce disposable income, are hurting households’ welfare. The choices are easier as you move up the social ladder: then, food is a much smaller share of monthly purchases. The fabular “poor and vulnerable” segment of the population are, as usual, bearing this new encumbrance. Whereas the NBS’ figures suggest a lag of about two months (in the case of the flood events) and one month (for tariff increases on rice and wheat) between shocks to the food sector, and corresponding price responses, most dinning tables in the country appear to have felt these shocks a lot earlier.

What to make of the new inflation numbers? One of the less easy aspects of the meeting, last month, of the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee – MPC) was making sense of the “conflicting price signals” in the inflation numbers for October. Headline and food inflation went one way (up), while core numbers trended a different way – downwards. Now, with all the indices headed the same way (up) a month after, is the CBN’s job made any easier? The process of finding a useful answer to this question will benefit from a determination of the trends in the inflation numbers for November. Since falling to 9.9% in August, from 12.1% in July (a drop explained by the NBS in terms of what it called a “significant base effect”), the composite index has risen every month (on a year-on-year basis). In September (for the first time) the NBS partially attributed higher food prices to the “impact of the floods on the production of certain crops”.

Given that the floods that caused so much disruption in the nation’s agriculture belt raged from July to mid-October, and leveraging the NBS’ lag period, it is fair to expect its effect on domestic food prices to reach into December. Now, this is assuming that the support infrastructure for agriculture is been repaired as we speak. (Unfortunately, it would seem that a lot of the nation’s farmland is still under water). Otherwise, the possibility of ancillary effects of the flood on food prices lasting for far longer is very high. The challenge of crafting appropriate policy responses to this possibility is higher still: too many independent variables are up in the air.

Core inflation numbers offer a slightly different order of difficulty for the policy intent. Because “core” numbers back out volatile inflation measures (food and energy, for example), most policy making tends to target them. Apparently, it is easier to anchor inflation expectations around phlegmatic numbers than around mercurial ones. In our case, after rising dramatically from 11.9% in February to 15% in March, the “All Items less Farm Produce” measure remained stuck at or close to 15% till it dropped precipitously to 13.1% in September, and 12.4% in October. Again, the NBS indicted the “base effect” for much of this drama.

All year long, however, the CBN was persuaded that the “trajectory of prices and output (was) dependent on fiscal and structural policies than on the monetary stance”. In essence, that the nation had run out of room for manoeuvring monetary policy in pursuit of desired price responses. On this basis, the dramatic drop in the measure of core inflation in September called for a more detailed query of the numbers. Back out the NBS’ “base effect”, and the possibility of upside developments in the fiscal and structural space beckon. But we all know nothing of the latter variety happened. Our abecedarian government still grapples with crèche-level challenges. Now, without the “base effect”, and in the absence of marked improvements in the fiscal and structural space, how do we explain the upward trend in the core measure in November? The NBS’ account is quite straight forward: “Increases in the Core index was as a result of increases in the Housing, Electricity, Gas and other Fuel division, in particular rental and imputed rent prices, increased liquid fuel prices (such as kerosene due to the prevailing supply – demand gaps), increased air transportation costs, and clothing prices”!

Still gasping for air? Yes, I did gasp for air. But, not just on account of the length of the sentence. But because every single variable in this sentence has been around and trending upward throughout the year! Why then do they have this selective effect on the official measured price numbers?

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