April 2020 Inflation Review – Inflation Accelerates Amid Pandemic Risk, Ramadan Arrival

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In the latest report from the National Bureau of Statistics (NBS), the overall consumer price index – a measure of the average change in prices over time of goods and services purchased by consumers – was up 12.34% y/y in Apr’20 from 12.26% y/y in Mar’20.

Retail inflation inched higher on the back of a faster rise in both food and core prices. Annual food inflation accelerated to 15.03% y/y in Apr’20 (Mar’20: 14.98% y/y) while core inflation printed at 9.98% y/y (Mar’20: 9.73% y/y). Prices of food items like bread, fish, tubers, vegetables & fruits and bread & cereals were the main drivers of inflation in Apr’20.

COVID-19 price premiums inflate core prices y/y

Save for the Housing, water, electricity, gas and other fuel sub-index, all the other sub-indices recorded a faster rise in prices compared to Mar’20. However, core prices rose y/y at a faster pace (+25bps) than food prices (5bps). This was due to a faster rise in prices in some COVID-19 prone sectors (health, transport and restaurant & hotels) compared to food prices. The faster rise in prices in the vulnerable sectors reflects price premiums for services, amid steady demand, due to increased risk associated with rendering those services. Specifically, we note that the prices of health and transport services rose 23bps and 22bps m/m respectively in Apr’20.

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Ramadan arrival, lockdown pressure m/m food inflation

On a monthly basis, inflation rose by 18bps to 1.02% m/m (Vetiva estimate: 0.82% m/m) on a faster rise in food prices – compared to core prices. Food inflation rose by 24bps to 1.18% m/m (Mar’20: 0.94% m/m) as the demand for essential food products increased with the arrival of Ramadan.

Across sub-national, states that implemented some form of mobility restriction (including Lagos, Kaduna, Akwa Ibom and Ondo) early in the month recorded steeper rises in food inflation – above the national average-, reflecting disruption to food supply chains and its attendant impact on food prices.

Inflationary pressures mount on supply disruptions

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In the current month, we expect the headline inflation to print at 12.43% y/y, due to an anticipated rise in both food and core inflation. We expect food inflation to rise further to 15.09% y/y, as mobility restrictions persisted in May with more states involved from the start of the month. We also expect core inflation to inch higher to 10.07% y/y, as we anticipate that the pressure on transport and health service prices will persist through the month.

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In 2020, we expect the average inflation to inch higher to 11.86% y/y (2019: 11.39% y/y), on the back of a faster rise in both food and core prices. This is stronger than our previous estimate of 11.44%, as inflationary pressures continue to mount on pandemic-induced supply disruptions and impending price increases. We expect food inflation to come in higher at 14.10% y/y (2019: 13.73% y/y) as mobility restrictions – aimed at containing the spread of the virus – continue to disrupt food distribution, resulting in artificial scarcity and pressuring food prices.

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Also, we expect core inflation to average 9.86% y/y in 2020, higher than 9.16% y/y recorded in 2019. Core price pressures could stem from the continued pressure on health and transport service prices, as the local outbreak persists. Also, a much stronger recovery in oil prices could prompt an upward review of the pump price of Premium Motor Spirit (PMS), contributing to inflationary pressure across a number of other sectors. There are also indications that electricity subsidy will be removed by Jul’20, further adding to our expectation of accelerating core inflation in 2020.

Taking the build-up in inflationary pressure into consideration, we expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to maintain its current monetary policy stance, amid a rise in external and fiscal risks. A rate cut could be counterproductive for inflation, amid a souring economic outlook, while a hike could undermine ongoing efforts to stimulate growth. We believe the CBN will be more focused on the transmission of its unconventional policies to the economy, rather than taking action.

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