The Nigerian National Bureau of Statistics (NBS) will next week published the August 2020 Consumer Price Index (CPI) report and our expectation is that the aggregate index will rise to a new high of 333.5 points (from 330.1 in the prior month), strong enough to push Headline inflation to 12.86% y/y from 12.82%y/y in July.
The CPI is a weighted average measure of prices of baskets of consumer goods and services over a period (usually a month) and is used to determine the extent of increase (or decrease) in the average cost of living in an economy (i.e. Headline inflation) compared to the corresponding period a year earlier (or prior month).
From our analysis, we expect the increase in the Headline inflation rate for August to be mainly driven by the upsurge in the Food price inflation sub-component to 15.55%y/y (from 15.48% in July), while the Non-food price sub-component (i.e. Core inflation) is expected to decline mildly to 10.06%y/y from 10.10%y/y.
Our expectation of a further increase in the Food price inflation in August is anchored on two major factors – First, on the home front, the low harvest induced the high cost of staple foods and vegetables due jointly to the disruption of planting activities in March and April as a result of the Covid-19 pandemic lockdown, the perennial Farmer-herders crises, and the inconsistent and insufficient rainfall (due to climate change) to support the ones planted between March and June.
Hence, we expect the observed increases in the prices of common food items such as Tomatoes, Onion, Rice, Beans, and Vegetables in the market in August to reflect in the food price inflation index.
Secondly is the pass-through-effect of costly imported processed/semi-processed food items as a result of foreign exchange (FX) shortage in the secondary market for the importer of these items.
On the other hand, however, despite the increase in the formal and informal sector activities in August as a result of the further easing of the lockdown guidelines by the Federal Government, we expect Base Effect – defined as the distortion to the current estimate of an index caused by a disproportionately high value of the index (now used as the denominator in estimating the current period index) a year ago, to drag the Core inflation rate down mildly to 10.06%y/y from 10.10%y/y in the preceding month.
However, on a month-on-month basis, we expect the Headline inflation rate and its sub-components – the Food price inflation rate and the Core inflation rate to rising slowly compared to the prior month.
Specifically, we expect the Headline inflation to print at 1.02%m/m, compared to 1.25%m/m in July. Likewise, we expect the Food price inflation rate and the Core inflation rate to print at 0.63%m/m and 1.28%m/m respectively compared to a rate of 0.75%m/m and 1.52%m/m reported in the earlier month.
Conclusively, it is worthy to note that with the recently announced increases in Electricity tariff and PMS price (effective from September 1) and the reduction in Savings Deposit benchmark interest rate to 1.25% (which is expected to discourage savings appetite), Nigeria Headline inflation is likely to hit 13.8% by year-end.
GTI Research
