In our F Y-2020 outlook report, we highlighted 6 upside risks to consumer prices in 2020 and expected an increase in inflation. Those factors were: implementation of the new minimum wage; VAT rate hike; food price increases amid the closure of land borders; transition to a more cost-reflective electricity tariff; CBN’s expansionary monetary policy stance; and finally, the possibility of a naira adjustment.
True to our projection and expectation, headline inflation maintained an upward trend to 1 2.5 6% in Jun-2020, vs 1 1.9 8% in Dec-2019. Also, the Food and Core inflation sub-index climbed to 1 5.1 8% y/y and 1 0.1 3% y/y in Jun-2020, respectively. Notably, all the factors mentioned above materialised, except increased electricity tariffs. However, the COVID-1 9 outbreak and restriction of economic activities had a mixed impact, as it fuelled a spike in food prices while having a more negligible impact on the core sub-index.
Furthermore, lower regulated PMS prices in H1-2020 helped lessen pressure on the core index. In all, we expect the headline inflation rate to remain biased to the upside in H2-2020. Notably, as economic activities begin to pick up in Q3-2020, the impact of a higher VAT rate will remain.
Also, as CBN fully resumes F X intervention sales and international trading activities re-open, we might see upward pressure on the core index.
Meanwhile, we note that the CBN’s targeted liquidity injections might not create inflationary pressures, as they are expected to be matched with productive use. The food inflation rate is expected to continue to track higher as land borders remain closed. Overall, we expect the headline inflation rate to settle at 1 3.3% y/y by Dec-2020 (Pre-COVID-1 9 expectation – 1 1.9% y/y).
United Capital Research