As widely anticipated, headline inflation for the month of September increased for the seventh consecutive month by 47bps to 13.71% YoY, 58bps shy of our estimate of 14.29%. For us, we had anticipated a higher increase in headline inflation hinged on varying triggers.
These include the adverse impact of elevated transport cost, recent flooding encountered in northern Nigeria, the uptick in PMS retail selling price from N138.62 to a range of N155/litre to N160/litre, and the hike in electricity tariff which was implemented on the 1st of September 2020.
Although the tariff hike was suspended for a period of two weeks (September 28th to October 12th, 2020), information gathered from the DISCOs showed the increased tariff was implemented on a pro-rata basis from 1st to 27th of September 2020. We expected this to filter through core inflation.
Surprisingly, core inflation rose only 9bps to 10.59% YoY, despite the double-digit increases across major core sub-indices. Casting our minds to the 45% electricity hike in 2016, the HWEGF basket rose by 653bps in February. Furthermore, other supply shocks evident in the similar period led to double-digit increases across all key sub-indices, driving a 220bps expansion in core inflation.
Therefore, the outturn is core is surprising to us. Across the core index, expansions were seen in HWEGF (+16bps), Health (+50bps), Transport (+44bps), Furnishing (+23bps), Clothing (+20bps), amongst other core sub-indices.
Meanwhile, food inflation significantly rose 64bps to 16.65% YoY reflecting flooding in localized areas in the North, precisely in Kebbi and Niger state, as well as the extended lean season, according to FEWSNET. This was evidenced in farm produce which ticked 92bps higher to 17.29% YoY, outweighing moderations in imported (-1bp to 16.43% YoY) and processed (-230bps to 9.9% YoY) food inflation.
Akin to the annual numbers, the month on month numbers revealed headline inflation rose 11bps to 1.46% MoM and 54bps shy of our estimate of 2% MoM. Precisely, food inflation anchored the uptick, rising 18bps to 1.86% MoM owing to a 33bps increase in farm produce to 2.04%, MoM.
Notably, core inflation declined 7bps to 0.97% MoM despite increases across core sub-indices including Transport (+5bps), HWEGF (+4bp), Clothing (+4bp), Furnishing (+3bps) amongst other sub-indices.
Going forward, while the main season harvest in October is expected to curtail the pace of expansion in headline inflation, we believe the flood experienced in key Northern states poses a risk to food prices. For context, media sources revealed that farmers in Northern Nigeria have lost a significant portion of their harvest to flooding. That said, inflation for the month of October is expected to print at 14.04% YoY and 1.35% MoM.
ARM Securities Research