Earlier, the National Bureau of Statistics (NBS) released the Headline inflation figures for June-2020. Notably, the headline rate rose for the tenth consecutive month, from 12.40% y/y in May-2020 to 12.56% y/y – exceeding our estimate of 12.49%.
This was as the headline inflation rate ticked upwards by 1.21% m/m (vs. 1.17% in May-2020). Also, we observed that prices increased across all components of the index.
Specifically, the highest increases were recorded in the cost of food and medical supplies as supply chain disruption and COVID-19 pandemic persisted.
On a segmented basis, the food inflation rate rose from 15.04% y/y in May-2020 to 15.18% y/y in June-2020. This was as the m/m Food inflation rose from 1.42% to 1.48% m/m.
We believe that the sustained shortfall in domestic food supply relative to the demand, as farmers are yet to embark on the full harvest of their farm produce, coupled with the continued closure of land borders, fueled the increases in food prices during the period.
Elsewhere, the Core inflation sub-index inched up mildly by 10.13% y/y (vs. 10.12% y/y in May-2020) even as m/m pressure eased to 0.86% (vs. 0.88% in May-2020). Notably, across the components of the Core inflation sub-index, the highest increases were recorded in the Health and Transport segment.
Inflation Outlook
For the month of July-2020, we expect pressure on the headline inflation rate to be sustained, despite some positive developments during the month. For Food inflation, we expect the recently lifted ban on interstate movement to help ease the previous supply chain pressures.
However, downside risk remains the closure of borders, reducing the supply of food from foreign sources despite deficits in local production. For the Core inflation sub-index, several factors are pointing towards an increase in July-2020.
First, the upward adjustment in the PMS retail price band for July-2020 to N140.8/litre – N143.8/litre from N121.5/litre – N123.5/litre, is likely to add pressures on the local cost of production as well as a direct negative impact on consumer wallets.
Second, the recent adjustment in the official rate from N361/$1 to N381/$1 and the continued FX illiquidity in BDC and the Investors and Exporters window, will continue to drive up corporate cost components.
However, we note that the decision to delay the upward adjustment in electricity tariffs, which was prior scheduled for July-2020, should create some relief to the core sub-index.
Bearing all the above points in mind, we expect m/m inflation to come in at 1.1% in July-2020, pushing the headline rate to 12.66%.
