Earlier, the National Bureau of Statistics (NBS) released the inflation figures for Aug-2020.
Notably, the headline rate rose from 12.82% y/y in July-2020 to 13.22% y/y – the highest since April-2018, driven by a 1.34% jump in the month-on-month (m/m) changes in general prices (vs. 1.25% m/m in July-2020). Notably, price increases were observed across all components of the index with the highest increases recorded in the cost of food amid domestic supply shortages.
On a segmented basis, the food inflation sub-index rose from 15.48% y/y in July-2020 to 16.0% y/y in August-2020. Food prices increased 1.67% m/m (vs. 1.52% in July). Clearly, the sustained shortfall in domestic food supply relative to the demand, continued closure of land borders, increased input cost and FX market illiquidity, fueled the increases in food prices during the period. Elsewhere, the core inflation sub-index inched up by 10.52% y/y (vs. 10.10% y/y in May2020). Also, m/m pressure went up to 1.05% (vs. 0.75% in July-2020). Notably, across the components of the core inflation sub-index, the highest increases were recorded in the Health and Transport segment.
In our view, the outlook for the headline inflation rate remains biased to the upside for the rest of the year amid recent upward adjustment in electricity tariffs, fuel prices and FX market instability.
Furthermore, the food inflation sub-index is likely to worsen in September amid recent directive for the CBN to stop sales of FX to food importers, in addition to the border closure. Similarly, the core-inflation sub-index will track northwards following the hike in electricity and the move towards full deregulation of the downstream oil sector.
It must be noted that despite the recent resumption of FX intervention sales by the CBN at the spot and futures market, liquidity remains a challenge in the currency market amid worsening trade deficit, the huge backlog of FX demand by FPIs and capital rationing. Bearing the above in mind, m/m inflation rate for September-2020 is unlikely to drop below 1.3%. Thus, our headline inflation rate projection is estimated to come in at 13.51% y/y.
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