The base effect is the consequence of abnormally high or low levels of inflation.
The drop in Nigeria’s inflation rate observed in recent months is not entirely due to a fall in the prices of goods or a fall in the rate at which certain prices have increased; but partly due to the impact of a high base effect.
The base effect is basically, the consequence of abnormally high or low levels of inflation in a previous month (or year) distorting headline inflation numbers for the most recent month (or year).
Hence, a base effect can make it difficult to accurately assess inflation levels over time. For instance, a high inflation rate in 2012 can make the inflation rate in 2013 look relatively small, when compared year on year and doesn’t really provide an accurate or perfect picture of the level of price increases consumers are experiencing. This distortion is usually referred to as the base effect. Expert says it wears off over time if inflation levels are relatively constant.
An analyst at Edward Kingston Associates, Gbenga Olufeagba, a finance, research and analysis firm, while analysing the trend in Nigeria’s inflation rate, highlighted the influence of base effect and that “nothing has really happened”.
Renaissance Capital’s Sub-Saharan Africa Economist, Yvonne Mhango, also said the sharp slowdown in inflation rate of the housing, utilities and fuel sub-index was largely owing to a high base effect (following a sharp price increase a year earlier) rather than a fall in prices.
Ms. Mhango, said contrary to the firm and the consensus expectation that inflation would edge up in June, inflation slowed.
“The market was expecting inflation of 8.8 per cent, while we projected 9.2 per cent” she said.
“The slowdown in inflation was due to softer core inflation (all items less farm produce). To our surprise, core inflation slowed to 5.4 per cent in June, from 6.2 per cent in May. We had expected the naira weakness in June to translate into higher core inflation. The slowdown in core inflation was largely due to a significant decrease in ‘housing, water, electricity, gas and other fuels’ inflation to 7.8 per cent, from 12.5 per cent in May.”
Nigeria’s Consumer Price Index (CPI) which measures inflation, the average change over time in prices of goods and services consumed by people for day-to-day living, rose by 8.4 per cent year-on-year, in June, hitting its lowest in five years.
This was 0.6 percentage points lower than the 9.0 per cent rate recorded in May.
The National Bureau of Statistics (NBS) said compared with January this year, rates continue to trend lower across all three indices; the Headline, as well as the Core and Food sub-indices when they were recorded at 9.0 per cent, 11.3 per cent and 10.1 per cent respectively.
Relative to May, the bureau said slower rise in the headline index could be attributable to slower rises in all Classification of Individual Consumption According to Purpose (COICOP) classes (except the Food and Non-alcoholic Beverages Class).
The lower rates were reflected in average rates over the first half of this year, according to the report. It stated that during the period, the Headline, Core and Food indices averaged 8.9 per cent, 8.0 per cent and 9.9 per cent respectively. This is lower than the average over the same period last year which were recorded at 12.5 per cent 14.1 per cent and 11.8 per cent respectively.
Pressure on food prices
Despite the slowed rate of price increase generally, food prices, on the other hand, increased at a faster rate compared to May. The bureau said this is as a result of the fact that the country is deep into the planting season. “Food supplies continue to be tight as inventories decline, creating upward pressure on prices,” it said.
On a month-on basis, the food sub-index increased by 0.7 per cent between May and June.
“Food prices continue to gain upward momentum as the country is deep into the planting season. Markets are facing tight supplies of farm produce as inventory levels continue to dwindle, creating upward pressure on prices,” the statistics bureau said.
In June, the highest food increases were exhibited in the Fruits, Oils and Fats, Bread and Cereals, and Vegetables classes. The average annual rate of rise of the Food sub-index for the twelve-month period ending in June 2013 was 10.4 per cent when compared with the same period in 2012, marginally lower from the 10.5 per cent recorded in May.
However, significant price increases were also observed in the Actual and Imputed Rental prices, Clothing Materials and Accessories, Liquid and Solid fuels classes. The average 12 month annual rate of rise of the index was recorded at 10.7 per cent for the twelve-month period ending in June 2013, down 0.8 percentage points from the 11.5 per cent recorded in May 2013.
“We expect food inflation to soften towards the end of 3Q13 when the main harvest begins. Our inflation model shows that inflation will remain in the late single digits region in the second half of 2013. The upside risk to inflation is a weak naira and strong food prices, due to supply side issues” Ms. Mhango said.
She also said that the fact that inflation came in below the consensus expectation in June reduces the risk of a rate hike at next week’s Monetary Policy Committee meeting.
“We expect no change to the monetary policy rate of 12.0 per cent following next week’s MPC meeting. We think the probability of a rate cut is reduced by the significant risks to the naira,” she said.
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