Anatomy of Namibian inflation

 

Anatomy of Namibian inflation

 

The Namibia Consumer Price Index (NCPI) indicates that annual inflation for all items eased to 6.1% (+0.17% month on month) in April this year, from the 6.3% recorded in March.

 

Inflation has thus trended lower since last November - a three-year high of 7.5%. The graph below reflects how, over the last decade, inflation has gyrated between 12.9% and 0.9%.

 

 

 

Source: Namibia Statistics Agency; Broadside Capital

 

With a 29.63% weight, food is the biggest driver of the NCPI. While stable at 6.9%, April’s inflation numbers reflect how annual food inflation has continued its downward trajectory. After declining over Q4 2012, the Food and Agricultural Organisation (FAO) food price index has been climbing year to date, indicating mounting global food price pressure going forward.

 

The FAO food price index averaged at 215.5 points in April. At this level, the index was only 9% below the peak reached in February 2011.

 

 

Source: Namibia Statistics Agency; Broadside Capital

 

The rise in food prices presents a secular theme as global demand increases in the face of periodic supply disruptions due to circumstances beyond anyone’s control, such as the weather and an ever-increasing consumer base. Indicators like the FAO food price index can be used as a reliable forward-looking indicator, particularly when complemented by local and regional intelligence on crop and livestock production.

 

 

Source: Namibia Statistics Agency; Broadside Capital

 

Housing and utilities (water, electricity, gas and other fuels) annual inflation has had a firm upward trend since the beginning of the year, reaching 9.5% as of April. This component has a 20.59% weight in the NCPI and can be expected to remain elevated until next month when a higher base kicks in.

 

Annual increases in rentals should also be considered by businesses when their lease agreements are due to be renewed. Businesses should thus use their bargaining power to influence rental escalation.

 

Expected higher electricity, gas and other fuel prices going forward, may, for some companies, be mitigated through investment in alternative sources for energy intensive industries.

 

 

 

Source: Namibia Statistics Agency; Broadside Capital

 

April’s annual transport inflation continued its descent to 4.3% from 5.1% in March. This component of inflation is led mainly by fuel prices and vehicle purchase prices. It accounts for a 14.79% weight in the NCPI. According to the International Energy Agency (IEA), the supply shock created by a surge in North American oil production will be as transformative to the market over the next five years. The good news is that this is helping ease oil prices, which have been relatively tight for several years.

 

Even as lower fuel prices provide relief to fuel intensive companies (and individuals operating their own vehicles), commuters will most likely be stuck with the higher public transport fares, as such, services hardly ever re-price downwards.

 

 

 

 

Source: Namibia Statistics Agency; Broadside Capital

 

The graph above shows how services inflation overtook goods inflation this time last year. Two months ago, services inflation eased to 4% from 4.2% in March while services inflation eased to 9.7% from 9.9%. 

 

While the level of both goods and services inflation is subject to permanent shifts, the gap between services inflation and goods inflation over time remains stable. Moreover, when the gap is above its long-run value, as is currently the case, equilibrium is restored through a rise in goods inflation and a slowing of services inflation.

 

The recent stability of inflation is consistent with the prevalence of ongoing global economic slack and a more muted response of inflation to cyclical conditions. It appears that ongoing monetary accommodation (lowering interest rates) is unlikely to have significant inflationary consequences. Notwithstanding, policymakers must remain alert to possible imbalances that may not be reflected in consumer price inflation numbers. PF