Headline Inflation Spikes to 15.75%; As All Composite of the CPI Rose Higher

food September Annual Inflation Rate Rises to 13.71% amid Continued Increase in Food Prices
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Headline inflation spiked year-on-year (YoY) to 15.75% in December 2020 from 14.89% in November 2020, as all composites of the Consumer Price Index (CPI), increased in the period.

Month-on-month (MoM), the index increased by 1.61% in December 2020 from 1.60% in November 2020. Food inflation (the significant driver of the headline inflation) rose YoY to 19.56% in December 2020 from 18.30% in November 2020. MoM, the index increased further by 2.05% from 2.04% in November 2020.

Core inflation increased YoY to 11.37% in December 2020 from 11.05% in November 2020. The index rose MoM by 1.10% in December 2020 from 0.71% in November 2020. The twelve-month average headline inflation for full-year 2020 stood at 13.25%.


The headline CPI continued to surge higher since the land border closure in August 2019, mainly due to the persistent increase in food prices. Food prices have been rising due to its short supply in the local market.

Local food supply had been affected by the rising insecurity in the central food-producing states, which had impacted adversely on farming activities. Thus, in December 2020, the headline inflation printed at 15.75%, a 37-month high, due to the surging food prices.

Food inflation came at a record high of 19.56%, a level last since November 2017, mainly due to surge in local prices. Imported food inflation rose YoY by 16.65% compared with overall food inflation of 19.56% in December 2020.

We believe that some of the crucial factors that led to increased food prices in December 2020 include festive activities, Naira devaluation, which impacted imported food prices and high transport costs.

Core inflation increased YoY by 32bps to 11.37% in December 2020 driven by FX adjustment, VAT increase, and hike in energy tariff. Decomposing the index, health, and transport cost rose the most YoY by 49bps to 14.06% and 13.07%, respectively.

We believe that the increases were occasioned by the increased risk in the health sector due to the second wave of COVID-19 and increased commuting activities due to the Christmas celebration.


We expect the surge in the headline inflation to continue in the coming months on the back of increased food prices. Though the land borders are now open, importation of food items is still banned.

Though we believe that the implementation of the African Continental Free Trade Area agreement may ease the inflationary pressure, we think it may take time to materialise. We believe that inflation is skewed to the upside in 2021 due to further headroom for Naira devaluation and some austerity measures due to limited government revenue.

Expected Policy Response

The Monetary Policy Committee (MPC) meeting is scheduled to hold on January 20, 2021. The current macroeconomic realities are expected to be debated and a policy decision to steer the economy made.

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In our view, we expect the Committee to leave the policy rates unchanged despite the upward trend in inflation. The rationale for our position is that we think the Committee is rather focused on stimulating the economy out of recession.

The typical policy response to an inflation increase would be to hike rates; however, the policy decision could hamper the government’s economic recovery efforts.

Therefore, we do not expect to see changes in policy rates.

What It Means for the Financial Markets

We expect to see a slight repricing of yields in the fixed-income market, especially at the long end of the curve. On the shorter end of the yield curve, we expect the low yields to sustain.

On the basis that we expect the Committee to leave policy rates unchanged, it is most likely that the Central Bank of Nigeria would manage liquidity in the financial markets using fixed-income yields.

Rising inflation portends a higher risk expectation, mainly as it feeds into the stocks’ equity risk premium. Nonetheless, we believe that the positive momentum in the equities market would sustain.

Firstly, we expect the full-year earnings releases and dividend declarations to drive increased attention in the stock market in the near term. Secondly, we expect liquidity in the financial system and the low-yield environment to persist. In our view, we think that the equities market could still absorb more inflows in the near term.

We do not expect to see a material deviation in the FX markets. The illiquidity and vulnerabilities in the Nigerian foreign exchange market are still prevalent. Meanwhile, a higher inflationary trend heightens the macroeconomic weaknesses of the Nigerian economy.

Other Highlights:

Headline Inflation Spikes to 15.75%; As All Composite of the CPI Rose Higher Brandspurng

  • Food inflation increased by 126bps to 19.56% YoY in December 2020 from 18.30% in November 2020. Month-on-month, the index rose by 2.05%, relative to 2.04% recorded in November 2020. The sharpest price increases in the index were on bread & cereals; fish; potatoes, yam, and other tubers; vegetables; meat; oil & fats; and fruits.
  • Core inflation increased YoY to 11.37% in December 2020 from 11.05% in November 2020. The index increased MoM by 1.10%, from 0.71% in November 2020. Significant price increases were recorded in passenger transport by air; medical services; motor cars, maintenance and repair of personal transport equipment; dental services; hairdressing salons and personal grooming establishments; motorcycle; hospital services; vehicle spare parts; passenger transport by road; bicycles; repair of furniture; miscellaneous services relating to the dwelling; paramedical services; and shoes and other footwear.