Consumer prices sustained the inflationary pace in November, as headline inflation rose to a new 34-month high of 14.89% y/y (Vetiva: 14.86% y/y). We attribute this to underlying supply-side shocks from the continued closure of land borders, a weaker Naira and higher fuel prices.
The hike in retail PMS pump price to ₦170 contributed to the build-up in headline inflation for the month, which rose by 1.60% m/m (Oct’20: 1.54%), its fastest in 42 months.
The pass-through of higher fuel prices into transport costs elevated food inflation for the fifteenth consecutive month to 18.30% y/y (Oct’20: 17.37%), amid pre-existing border restrictions. On the flip side, core inflation moderated to 11.05% y/y (Oct’20: 11.14%).
Food inflation propelled by familiar levers
Food prices have been hit on several fronts. With the border closure being a remote cause, dollar restrictions on food imports as well as pandemic-induced disruptions & missed planting seasons were immediate triggers to food inflation.
Since the beginning of the year, both non-alcoholic and alcoholic segments of food inflation have recorded consistent y/y inflationary pressures except May’20 where restrictions on restaurant and bars slightly suppressed demand for alcoholic beverages.
In the month of November, both segments recorded steeper increases with the non-alcoholic pack (Nov’20: 18.20% y/y) ahead of the alcoholic segment (Nov’20: 11.03% y/y) as supply-side shocks and structural changes upset food prices.
Core inflation slides for the second time this year
From the devaluation of the naira to FX restrictions on visible imports and higher PMS prices, non-edible items were not spared from inflationary spikes although core inflation fell slightly by 9bps to 11.05% y/y (Oct’20: 11.14% y/y). Since Mar’20, the health index has been the most pressured core segment, both on a m/m and y/y basis due to pandemic-related expenditures.
In November, health inflation rose by 13.57% y/y (Oct’20: 13.08% y/y), a level last seen nearly a decade ago. Similarly, transport inflation rose to 12.57% y/y (Oct’20: 12.11% y/y), being the next most pressured segment since July’20 as a result of the monthly adjustments to retail pump prices.
Meanwhile, the Housing, Water, Gas, and Other Fuels (HWGS) segment continues to reflect higher energy costs, rising to 8.72% y/y in Nov’20 (Oct’20: 8.47%).
Could there be a respite to inflationary pressures?
2020 has indeed been a tough year for consumers and producers alike from the spillovers of border closures to VAT hike, COVID-related distortions, short-lived electricity tariff hikes and monthly petrol pump adjustments. For the first time since 2016, consumer prices are set to undergo 12 consecutive months of inflationary pressures in a given year.
In both years, we witnessed adjustment in the exchange rates however, this year has been more peculiar, with the disruptions in the agricultural sector and removal of fuel subsidies.
We believe the recent moves by the Nigeria Labour Congress (NLC) to reduce PMS prices by ₦5 will have a negligible effect on inflation, which will keep fuel prices 13.8% higher y/y post-adjustment.
In addition, the build-up in year-end festive demand informs our inflation expectation of 15.91% for December 2020, translating into an average FY’20 forecast of 13.22% (FY’19: 11.73%).
Recently, the President raised optimism on the possible reopening of land borders. While this could provide some respite for food inflation in 2021, we do not expect any significant impact in the current year, given the existent restrictions on land borders and year-end festivities.
That said, we raise our food inflation forecast to 16.13% y/y for FY’20 (FY’19: 13.73% y/y) as disruptive effects of missed planting seasons persist.
As we approach the end of the year, consumer prices will keep reflecting the impact of structural changes in the economy. In 2021, fundamental shifts in economic policies could alter the path of inflation. For instance, a possible reopening of borders – as hinted by the President – could provide succour to food inflation.
However, insecurity in the north could deter dry season farming, which would be vital in alleviating pressures from the disruptions. Alongside the expected review in electricity tariffs, consumers may continually face pressures on both food and core segments in 2021.
