In H2-2021, the direction for inflation is expected to take an interesting turn with several factors shaping aggregate price level direction. Some inflationary drivers include food supply shortages and resumption of total deregulation of the downstream oil and gas sector.
Although the harvest season comes in the second half of the year, we do not foresee a significant improvement in the food supply. Traditionally, m/m food inflation in the second part of the year (particularly during the harvest months of September to December) prints lower than the first part of the year.
However, over the past two years (2019 & 2020), the narrative has changed with m/m food inflation garnering pace during the harvest periods. This has been driven largely by unabating security challenges in the middle belt and food-producing Northern states, reducing farming populations across the states.
Thus, we express concern that food supply during the harvest season may be grossly inadequate creating a concerning food shortage.
Furthermore, following the surge in crude oil prices, the landing cost of petrol has risen significantly without any transmission into the pump price of petrol, as the government resumed subsidy payments, a development expected to last for six months (up till Oct-2021).
However, the subsidy payments have significantly dragged on government revenues, with payments estimated at over N100.0bn every month.
Despite the upside risks to inflation, we reckon to see inflation resume a downtrend due to a high base from 2020 represents the biggest drag on an increase in inflation. Overall, we forecast the average inflation rate for 2021 to print at 17.3%, higher than the 13.2% recorded in 2020.
