NBS inflation figure for December seems understated

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NBS

The latest Consumer Price Index report by the National Bureau of Statistics discloses that the CPI, which measures inflation, moderated to 15.37 per cent in December 2017 down from 15.90 per cent the previous month making it the 11th consecutive disinflation in headline year-on-year inflation since January 2017. Highlights of that report, published on January 16 2018, include a drop in the urban inflation rate to 15.78 per cent (year-on-year) in December from 16.27 per cent recorded in November 2017, while the rural inflation rate also eased by 15.02 per cent in December from 15.59 per cent in November.

The report also indicates that the Food Index decreased by 19.42 per cent (year-on-year) in December, down from the 20.30 per cent recorded in November while the “All Items less Farm Produce” or Core sub-index, which excludes the prices of volatile agricultural commodities, dropped from 12.20 per cent in November to 12.10 per cent in December 2017.

The report is short on the likely reasons for the drop in inflation rate beyond stating that  the rise in the food index was caused by “increases in prices of bread and cereals, potatoes, yam and other tubers, coffee tea and cocoa, milk cheese and eggs, fish and oils and fats”. With regard to core inflation, “the highest increases were recorded in the prices of fuel and lubricants for personal transport equipment, solid fuels, passenger transport by air, clothing materials and other articles of clothing, vehicle spare parts, non-durable goods, furniture and furnishing, carpet and other floor coverings, shoes and other footwear, bicycles and motorcycles, hospital services and glassware, table and household utensils and appliances”.

Not a few economic and financial analysts are surprised by this report especially given the astronomical cost of fuel and transport in December 2017. A cursory look at other reports by the NBS brings out the full import of the presence of these two inflation drivers. For example, the report on the Premium Motor Spirit (Petrol) Price Watch, published a day earlier (January 15, 2018) on its website, indicates a spike in the average price paid by consumers for petrol “by 17.10 per cent year-on-year and 17.98 per cent month-on-month to N171.8 in December 2017 from N145.6 in November 2017”. Similarly, “the average price paid by consumers for automotive gas oil (diesel) increased by 3.29 per cent month-on-month and by 4.87 per cent year-on-year to N205.81 in December 2017 from N199.26 in November 2017” while the average price per litre paid by consumers for kerosene “increased by 6.32 per cent month-on-month and 22.50 per cent year-on-year to N284.03 in December 2017 from N267.14 in November 2017”.

On January  17, 2018, the NBS also published the Transport fare Watch report for December 2017 which reveals that the “average fare paid by commuters for bus journey within the city increased by 23.99 per cent month-on-month and 14.78 per cent year-on-year to N171.34 in December 2017 from N138.19 in November 2017” while the “average fare paid by commuters for bus journey intercity increased by 14.04 per cent month-on-month and 5.22 per cent year-on-year to N1,716.26 in December 2017 from N1,505.00 in November 2017”.

It goes without saying that the cost of energy and transport are among the greatest inflation drivers in Nigeria today not the least because these cost elements directly or indirectly impact the prices of commodities due to the tendency for other sectors of the economy (even with no link to petrol) to take advantage of any increase in transport costs. This fact is corroborated by various communiqués issued by the Monetary Policy Committee of the CBN which have not failed to note the “structural factors driving the sustained pressure on consumer prices, such as the high cost of power and energy, transport and production factors”.

Therefore, if fuel and transport costs are up in a particular month, it will be contrary to apriori expectation to record a relatively significant decrease in headline inflation month-on-month especially in a month the government says it released N750bn to federal Ministries, Departments and Agencies from the capital allocation of the 2017 budget and during which the CBN halted its weekly liquidity mop-up operations. More so, when there is evidence to suggest that the costs of fuel and transport do not have a lagged effect as their pass through effect is expected to be felt from the very month of the increase. It will be recalled that following the removal of fuel subsidy in May 2016 which jerked up the pump price of fuel from N86.50 to N145 per litre, inflation rate climbed to 15.58 per cent in May 2016. It was 13.72 per cent the previous month. In fact, it is widely believed that the hike in fuel price and electricity tariffs (exacerbated by forex scarcity and high exchange rate) were the major factors that triggered the uptrend in inflationary pressure in 2016.

The NBS CPI report has come as a surprise also because the inflation figure for December did not seem to take into consideration the peculiarities of the month. Typically, the festive period is characterised by higher spending. The trend in the last couple of years shows increases in the CPI between November and December. In 2013 for example, inflation increased from 7.93 per cent in November to 7.96 per cent in December. In 2014, it went from 7.93 per cent in November to 7.98 per cent in December. In 2015, the month of November recorded 9.37 per cent while December posted 9.55 per cent. In 2016, the increase was from 18.48 per cent in November to 18.55 per cent in December. Therefore, the CPI report seems not in tandem with recent developments around prices in the month of December.

Consistent with this view, some independent research firms had expected inflation in December to come in higher than the 15.37 per cent figure reported by the NBS. For example, the Financial Derivative Company had projected that “headline inflation will creep up to 15.94 per cent in December 2017 from 15.90 per cent in November” driven chiefly by seasonality and supply shocks (fuel crisis) while FSDH Research had expected “inflation rate (year-on-year) to drop to 15.85 per cent in December 2017 from 15.90 per cent recorded in the month of November driven by the base effect”. As reported by Proshare, December inflation came in below Vetiva’s expectation of 15.7 per cent “despite nationwide fuel shortages that increased average premium motor spirit prices by 18 per cent” while FBNQuest Research expectation, shared with wire service polls of analysts, was 16 per cent on the basis of higher seasonal demand.

The NBS currently constructs the CPI using the popular Laspeyres formula after collecting price data from 10,534 informants spread across the country in respect of 740 goods and services. Much as the relative stability in exchange rate (which was not peculiar to the month of December anyway) would combine with “base effect” (from high 2016 inflation rates which rose to 18.55 per cent in December of that year) to usher in some moderation in consumer prices in the month of December 2017, it does not fully explain the relatively considerable drop in the core index figure for December. The long established seasonality factor, coupled with the presence of “bellwether variables”, notably high cost of fuel and transport, seems to point to an inflation rate that is understated.

Maybe, it is time to tweak the methodology to reflect realistic weightings and revalue (from the current November 2009) to a more recent time the consumption expenditure data used in the computation of the CPI. Given that the CPI is the most widely watched inflation measure in Nigeria, the variance between official and independent inflation figures should actually converge in order to give some credibility to the official rate and make it useful not only to the government but also to participants in the highly sensitive financial markets.

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