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The National Bureau of Statistics (NBS) reported last week that
inflation edged up marginally to 12.1 per cent year on year (y/y) in January,
from 11.8 per cent y/y in December, although it was still below the 12.8 per
cent and 13.4 per cent recorded in November and October.

The persistent rise in food prices, globally and locally
notwithstanding, the Bureau’s report states that food inflation dropped to 10.3
per cent y/y (a record low since February 2008), from 12.7 per cent, and 14.4
per cent in December and November. The ‘All items less farm produce” inflation
also increased to about 12.1 per cent from 10.9 per cent in December and 11.7
per cent in November.

Samir Gadio, Emerging Markets Strategist, Standard Bank,
however, noted that it is rather unusual to have a negative food inflation rate
at this month of the year.

“This implies that month-on-month (m/m) food inflation declined
to -0.9 per cent in January, from 0.9 per cent in December and 0.3 per cent in
November; interestingly, a negative m/m food inflation rate is somewhat unusual
in Nigeria this month of the year,” he said, adding that this happened in
January 2007 for the last time.

“In this regard, the negative imported food sub-inflation rate
appears to highlight that Nigeria has until now been somewhat immune to
exogenous pressures associated with rising oil and global food prices, but the
magnitude of the downturn in this category, to -5.6 per cent in January, from
13.7 per cent in December and 15.1 per cent in November, is somewhat intriguing
and will probably require further official clarification,” Mr. Gadio said.

According to him, most of the pressure still continue to
originate from the “Housing, water, electricity, gas and other fuel”
sub-component (16.7 per cent of the CPI basket) which registered a 13.2 per
cent increase, from 13.0 per cent in December and 12.6 per cent in November.

“As such, there was no sign of a tangible structural shift in
core inflation that would be fuelled by the demand side of the economy on the
back of the loose fiscal policy stance, which we think has been offset by a
weak money multiplier and sluggish private sector credit metrics over the past
couple of years,” he further said.

Unpredictable outlook

Mr. Gadio is, however, hopeful that inflation could drop in
February.

“According to our calculations, year on year inflation would drop
in February if month on month consumer prices are below 1.9 per cent. This
looks possible at this stage since such a m/m rate has been recorded only once
in the second month of the year since 2006 (in 2010) and the average of monthly
inflation rates in February between 2006 and 2011 is 1.06.

Mr. Gadio says if this scenario materialises, it would
positively support bond prices, especially as the liquidity ratio is also
increased from 25 per cent to 30 per cent on 1 March by the Central Bank.

“Nevertheless, the slight pickup in consumer prices in January
could still push the Central Bank to moderately hike the Monetary Policy Rate
during its March MPC meeting, as the policy focus has shifted from a recovery
in credit and growth to inflation in recent months,” he said.

Bismarck Rewane, the managing director, Financial Derivative
Company, is of the opinion that the nation’s inflationary threats are distinct
and prominent.

“World banks are shifting their focus away from the main
objective of controlling inflation. Until now, there were split between those
that adopted the explicit inflation targeting framework or implicit,” Mr.
Rewane said.

According to him, the average inflation for 2010 was 13.8 per
cent and the Central Bank’s single digit target was not achieved, though
inflation declined for the 6th consecutive month to 11.8 per cent (y/y) in
December.

“Robust liquidity growth, combined with recovery in bank lending
is expected to cause strong growth in money supply. Inflationary threats remain
real and pronounced,” he said, adding that the increase in minimum wage,
tighter fiscal policy and election spend, sale of the rescued banks, imported
food inflation, among others, are factors that fuel the pressure on the
nation’s inflation echelon.