Nigeria’s consumer inflation inched higher to 12.20% y/y (Vetiva estimate: 12.34% y/y) in Feb’20, data from the National Bureau of Statistics (NBS) showed. This is a faster inflation rise compared to Jan’20 (12.13% y/y) and 11.37% y/y a year ago.
However, the pace of growth of the annual inflation rate is low (+7bps) compared to an average growth of +18bps per month recorded in the last five months of 2019, following the land border closure. This means the impact of the border closure on certain goods & services has started tapering, and prices are getting normalized. Although the headline inflation number came in weaker than expected, it is still well above the Central Bank of Nigeria’s (CBN) comfort level.
The increase in the annual headline inflation rate is underpinned by a faster rise in prices, across both the food and core components of the index in February compared to January. Food inflation rose to 14.90% y/y from 14.85% in Jan’20, while core inflation also inched higher to 9.43% y/y from 9.35% y/y in January. Prices of food items like fish, meat, vegetables and cereals were the main drivers of inflation, as food prices continued to bottom out while the implementation of the 7.5% VAT rate pressured core components.
Monthly inflation cools on weak demand
On a monthly basis, all inflation indices eased, reflecting sluggish aggregate demand. Lending credence to the hypothesis of weaker demand in Feb’20 is the Purchasing Manager’s Indices readings for Feb’20 which revealed that, although purchasing managers’ purchases grew at a faster pace in the month, new order levels grew at a slower pace and the stock of finished goods grew at a faster pace, indicative of weaker than anticipated demand. As a result of weaker demand from consumers, the monthly headline inflation slowed to 0.79% m/m (Jan: 0.87% m/m) led by the 12bps m/m moderation in food inflation from 0.99% m/m in Jan’20 to 0.87% m/m in Feb’20.
Core prices to limit inflation moderation
Although we expect domestic demand to be in congruence with the global trend and remain fragile, we see little room for a sharp moderation in inflation in FY’20. As such, we expect the annual inflation rate for FY’20 to print at 11.5% y/y, weaker than our previous estimate of 11.8% y/y as fears of an impending recession and the impact on supply chain disruptions rein in domestic demand.
However, prices of items such as medicines and healthcare services may spike in the near term due to price-gouging. Unfortunately, also, the recent slump in crude oil prices is unlikely to reflect in core-inflation through a reduction in the pump price of Premium Motor Spirit (PMS), as the downstream oil sector is regulated. In addition, the looming upward review of electricity tariffs would prevent a sharper moderation in headline inflation. We are also not ruling out the possibility of a pass-through impact of currency pressures on consumer prices through imported inflation.
In the ongoing month, we expect the headline inflation to print at 12.30% y/y led by both food and core price pressures. We expect both the food and core inflation for Mar’20 to come in at 15.08% y/y and 9.52% y/y respectively as food prices continue to be pressured by seasonality while core price pressures could stem from the health and transport sectors.
The softer outlook for inflation expectation leaves no room for monetary policy accommodation in the coming months as the slump in oil prices has put the country in a critical situation. Therefore, we believe the CBN will be more focused on the transmission of its unconventional policies to the economy rather than opting to lower the benchmark interest rate to stave off a coronavirus-induced recession.