January 2020 Inflation – Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y

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Data from the National Bureau of Statistics (NBS) showed that consumer prices in Nigeria rose faster in Jan’20 compared to Dec’19 and Jan’19. Annual inflation rate – based on consumer prices – accelerated to 12.13% y/y (Vetiva estimate: 12.35%) in Jan’20, quicker than 11.98% y/y in Dec’19 and 11.37% y/y a year ago.

The increase in the headline inflation rate is underpinned by a faster rise in prices, across both the food and core components of the index in January compared to December. Food inflation rose to 14.85% y/y from 14.67% in Dec’19 while core inflation also inched higher to 9.35% y/y from 9.33% y/y in December. The uptick in food prices in January was backed by rises in prices of bread & cereals, meat, fish, oils & fats, and tubers while the rise in prices for health services, air transport, clothing, and household utensils induced the increase in the core price index.

Base effect intensifies pressure on consumer prices

While consumers seemed to be frugal in January – based on the results of the PMI surveys conducted by the CBN in January – the rise in inflation was slightly steeper (+15bps) compared to the 13bps rise recorded in Dec’19. This was due to the unfavourable base effects from the corresponding period in 2019, combined with the supply-side inflationary pressure that was induced by the continued closure of the land borders.

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All the inflation sub-components recorded faster price growth in January compared to Dec’19, led by the health sub-index whose annual rate of increase was up by 19bps in Jan’20 relative to its level in Dec’19. This was closely followed by the food & non-alcoholic beverages sub-index whose inflation rate in Jan’20 was higher by 18bps compared to Dec’19. The food price index continues to reflect the impact of the border closure as food prices are up by 168bps to date (14.85%), from a record low of 13.2% y/y in August.

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January 2020 Inflation - Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y - Brand Spur
Vetiva Research

Balance of risks remains on the upside

We expect inflationary pressures to be more intense in February, following the implementation of the new VAT rate whose burden we believe will be borne mostly by consumers. Consequently, we expect the headline inflation to inch higher by 21bps to 12.34% y/y and by 5bps to 0.92% m/m. Our expectation of a steeper rise in inflation in February is supported by the possible combination of unfavourable base effects and the pass-through of the VAT upward review to consumer prices.

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We expect headline inflation to peak in April at 12.41% y/y as festivities (Easter and Eid al-Fitr celebrations) put demand-side pressures on food prices, on the back of the unfavourable base for H1’20. We also see core inflation numbers reaching 9.80% over the coming months due to the impending electricity tariff increase – which takes effect in April – and the rise in land transportation costs, following the cancellation of flights by domestic airlines because of inclement weather.

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However, we expect headline inflation to glide lower from May as the base turns favourable and food prices respond to harvest. For 2020, we anticipate a mark-up on average inflation to 11.84% y/y from 11.39% y/y in 2019 as both base effect and price momentum are likely to keep prices elevated in the near-term.

Room for further monetary policy accommodation rests on the deceleration of inflation in the coming months. The probability of such an outcome is challenging, given the anticipated pressure points to inflation in the near term. The anticipated buildup of inflationary pressure reinforces our expectation that the central bank will maintain a tight monetary policy stance for the rest of the year, while also focusing on the transmission of its unorthodox policies to the economy.

Vetiva Research

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January 2020 Inflation - Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y - Brand SpurJanuary 2020 Inflation - Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y - Brand Spur

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January 2020 Inflation - Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y - Brand SpurJanuary 2020 Inflation - Base Effect Pushes Jan’20 Retail Inflation to 12.13% y/y - Brand Spur

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