January 2021 Inflation: Off to a weak start

November Headline Inflation Rate Accelerates to 14.89% amid Sustained Rise in Food Index Brandspurng

Consumers’ purchasing power continued to be eroded as headline inflation rose by 71bps to 16.47% y/y (Vetiva:16.73% y/y) in the first month of the year, no thanks to the lingering impacts of the pandemic.

Commodity prices continue to take a beating from higher PMS prices and currency challenges, despite the suspension of electricity tariff review and the reopening of the borders.

Supply constraints chief among food triggers

Food inflation maintained its 3-year long ascent to 20.57% y/y (Vetiva: 20.95% y/y), propelled by the prolonged impact of supply chain disruptions, conflict in food-producing areas and higher distribution costs.

November Headline Inflation Rate Accelerates to 14.89% amid Sustained Rise in Food Index Brandspurng

The non-alcoholic segment, which captures necessities spiked by 20.45% y/y (Dec’20: 19.45% y/y) experiencing greater pressures than the alcoholic segment, which rose by 11.61% y/y (Dec’20: 11.28% y/y).

Core inflation scorches persist

The weakness of the Naira propelled core inflation to a 3-year high of 11.85% (Dec’20: 11.37%). The exchange rate averaged ₦394/$ in the I&E window in Jan’21, compared with ₦363/$ a year earlier, reflecting limited foreign currency inflows despite dual peg adjustments.

For the ninth consecutive month, we observed a build-up in all core segments, compounded by the passthrough of higher fuel prices. The Housing, Water, Electricity, Gas and other fuels (HWGS) inflation, which has the largest weight in the core segment maintained its ascent to a 43-month high (Jan’21: 9.40% y/y).

Other heavyweights in the core segment – Clothing, Household equipment and Transport – continue to experience rapid y/y increases. Meanwhile, health (14.55% y/y) remained the most pressured segment for the ninth time in a row.

2020 Inflation Forecast

January 2021 Inflation brandspurng Off to a weak start
Source: NBS, Vetiva Research

The longest streak in a decade

In the month of February, we expect inflation to rise to 17.12% y/y, being the seventeenth consecutive month of higher inflation. This represents the longest inflationary run in the past decade.

While waning border-closure effects stoked prices in Feb’20, the economy had not experienced pandemic disruptions, currency adjustments and energy reforms. With these underlying structural changes crawling into the new year, we expect headline inflation to sustain its run into Feb’21.

More so, the disinflationary impact of the Africa Continental Free Trade Area (AfCFTA) and the suspension of electricity tariff review could be overwhelmed by sustained currency weakness and higher PMS prices, as oil prices sustain recovery.

Consequently, we expect headline inflation to average 18.53% y/y (2020: 13.25% y/y) in 2021 as higher oil prices stoke consumer prices via transportation costs.

Given elevated transport costs and supply-side shocks, food prices could continue to soar despite the reopening of the borders. Thus, we expect food inflation to rise to 21.77% y/y in the ongoing month.

In addition, subsisting FX restrictions on food imports could continually swell food prices. The pandemic’s after-effects are yet to subside as the planting season kicks off. With subsisting FX, energy and food security issues still in place, food inflation is expected to average 23.35% y/y in 2021 (FY’20: 16.11% y/y).

With economic recovery taking the upper hand in the first Monetary Policy Committee meeting of the year, the Central Bank of Nigeria’s FX management efforts will be essential in curbing currency-related inflationary triggers. Meanwhile, the benchmark interest rate could be sustained at current levels to support recovery efforts.