May 2021 Inflation: Base Effects Ease Pricing Pressures

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Nigeria’s inflation rate rises to 12.82% in July, as food prices surge
Photo by Nenad Radojčić on Unsplash

Headline inflation moderated for the second time in a row to 17.93% y/y (Vetiva: 18.85% y/y).

While this seems contrary to anecdotal evidence, we believe the high base effect was the primary driver of the moderation in the headline figure, as the reopening of the economy, restoration of supply chains, and reopening of the land borders eased pressure on the headline figure. On a month-on-month basis, however, headline inflation rose at a faster pace by 1.01% m/m (Apr’21: 0.97% m/m).

Food prices rise at a slower pace

Although food inflation eased to 22.28% y/y (Vetiva: 22.78% y/y) from 22.72% y/y in Apr’21, insecurity in food-producing regions continues to take its toll on food prices, as food inflation (May’21: 1.05% m/m) rose at a faster pace month-on-month (Apr’21: 0.99% m/m). The major driver of food inflation remains the food and non-alcoholic beverage segment, which is mostly affected by insecurity, adverse weather conditions, and higher pump prices.

Amid the reduction in food inflation, imported food inflation sustained its upward momentum to 16.97% y/y (Apr’21: 16.91% y/y) reflecting the pass-through effects of a weaker Naira and FX restrictions on food imports.

Structural headwinds squeeze core prices

Non-edible items are still reeling from pandemic-induced disruptions and structural factors (pump price adjustments and dual currency adjustments). This is evident in May’s core inflation outcome – 13.15% y/y (Vetiva: 12.78% y/y). While health and transport inflation lead the pack, we witnessed a moderation in both health (-5bps) and energy (-2bps) inflation for the first time since the pandemic struck. We also attribute this to base effects, given the absence of severe waves of the virus, reduction of PMS prices in Apr’20 and relatively flat PMS prices this year.

FX Reforms to intensify core inflationary pressures

In June, headline inflation could ease further, as base effects come to play. Notwithstanding, we note possible headwinds from the adoption of the Nigerian Autonomous Foreign Exchange (NAFEX) rate as the official exchange rate and the consequent impact on the parallel market.

Nonetheless, we pen down a higher m/m print of 1.12% y/y for the month of June (May’21: 1.01% m/m) which translates to a headline inflation expectation of 17.82% y/y for the ongoing month. Having adjusted our expectations for the outer months, we now anticipate an average inflation reading of 17.34% y/y for 2021 (2020: 13.25% y/y).

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While food inflation has moderated, the Onion Producers and Marketers Association of Nigeria is mulling over stripping the southern region of access to onions. While this shock is not broad-based, the resurgence of a food blockade across other key food items could have dire consequences for food inflation, especially if such threats re-emerge close to the harvest season. While we expect the prompt intervention to subdue this risk, high base effects could influence a further decline in food inflation to 21.79% y/y in June. Going forward, we note headwinds from the proposed addition of wheat and sugar to the restriction list and tailwinds from the reopening of the borders.

Thus, we expect an average food inflation outcome of 21.11% y/y in 2021 (2020: 16.11% y/y).

With new FX pressures on the scene, core prices could remain elevated in the near term as the Naira slips below ₦500/$ in the parallel market. Thus, we envisage a sustained rise in core inflation to 13.36% y/y in June. This translates to an average core inflation outcome of 13.05% y/y for 2021 (2020: 10.29% y/y).