Nigeria’s annual inflation accelerated to 12.56% y/y (Vetiva estimate: 12.44% y/y) in Jun’20 from 12.40% y/y in May, due largely to costlier food items, the National Bureau of Statistics (NBS) reported.
Inflation in the country has risen for ten consecutive months, driven by the concerted impact of border closure to check to smuggle, trade restrictions to curb the spread of the coronavirus, and the drop in the value of the Naira, on food prices.
Since the border closure was instituted in Aug’19, food inflation has gone up by 200bps to 15.18% y/y in Jun’20 while core inflation has since risen by 19bps to 10.21% y/y in Jun’20.
Food & non-alcoholic beverages, weaker Naira behind CPI acceleration
Food inflation in the review month edged up to 15.18% y/y from 15.04% y/y in May’20. Although the surge in prices of food & non-alcoholic beverages is primarily responsible for the rise in food inflation (+14bps), the prices of tobacco & alcoholic beverages were also under pressure as they rose by 11bps on an annual basis.
The same pattern played out on a monthly basis as prices of both food & non- alcoholic beverages and tobacco & alcoholic beverages rose by 6bps and 4bps respectively m/m, contributing to the 6bps m/m increase in food inflation to 1.48% in Jun’20 from 1.42% m/m in May’20. The impact of the previous Naira adjustment also reflected in prices of imported food (+2bps) in Jun’20 as imported food inflation came in at 1.29% m/m from 1.27% m/m in May’20.
Core prices are not decelerating either
Despite the pandemic, which has caused a drop in sales of services, prices of services have remained elevated. The pandemic has not resulted in a faster decline in service prices as such, on a y/y basis, core inflation inched up by 1bp in Jun’20 to 10.13% from 10.12% y/y in May’20.
The main pressure points on core prices remain the sectors worst hit by restrictions to curb the spread of the coronavirus including the health, transport, recreation and leisure sectors. For instance, inflation in the health sector rose by 43bps in Jun’20 from May’20 while housing, water, electricity, gas and other fuel (HWGS) inflation rose by only 9bps in Jun’20 from May’20.
Prices likely to move higher in months ahead
For the whole year, inflation will probably stay higher than we expected sometime earlier, around 12.48% y/y (2019: 11.39% y/y). This is c.8bps higher than our previous expectation in the light of a further adjustment to the Naira exchange rate.
The recent move to restrict access to FX for corn import could further intensify supply-side pressure on food prices and by extension, the headline inflation.
Consequently, we expect food inflation in FY’20 to accelerate to an average of 15.04% y/y from 13.73% y/y in FY’19. Pressure on core prices could also emanate from the impact of supply disruptions, further Naira adjustment and deregulation of petrol pricing on the cost of core items and services.
In the current month, we expect inflation to come in at 12.69% y/y, 13bps higher than June’s reading. This we believe will be driven by a combination of demand and supply factors including devaluation-induced higher pricing for consumption-imports, the increased price of premium motor spirit (PMS) and festivity-driven (Id el Kabir) demand.
In view of the fact that we expect domestic inflation to remain elevated and exceed the upper limit of the central bank’s tolerance band (6%-9%), we believe the most likely action from the Monetary Policy Committee (MPC) will be to stay pat on rates for some time. This is because there is still a large degree of uncertainty around how significant the coronavirus crisis will affect the economy and inflation in the coming months.
