According to the recently released data by the National Bureau of Statistics (NBS), headline inflation rose for the fourth consecutive month, rising by 20bps to 34.80% y/y in December (November: 34.60% y/y), settling below our estimate of 34.91% y/y. Breaking it further down, core prices (+53bps to 29.28% y/y) increased while food inflation (-8bps to 39.84% y/y) slowed.
Based on the preceding, average headline inflation settled at 33.18% in 2024FY (2023FY average: 24.52%). On a month-on-month basis, the headline inflation moderated by 20bps to 2.44% (November: 2.64% m/m) following the slowdown in food prices.
Food prices moderated by 32bps to 2.66% m/m (November: 2.98% m/m) despite the festive celebrations in December, pushing the y/y inflation rate down to 39.84% y/y. We believe the moderation in food prices may have been driven by pre-emptive buying, as many consumers likely stocked up in November to avoid anticipated price hikes during the festive period.
Additionally, we believe the delayed impact of the harvest season which typically should have taken effect from October, must have added to the slow down in food prices. Specifically, prices slowed across Farm produce (2.61% m/m vs November: 3.11% m/m), Processed food (2.68% m/m vs November: 2.95% m/m) and Imported food (1.69% m/m vs November: 3.27% m/m) sub-baskets
On the other hand, the core inflation increased by 41bps to 2.24% m/m (November: 1.83% m/m), primarily reflecting the impact of seasonal demand following the festive period and elevated energy costs on prices of core items. Consequently, we highlight that price pressures increased across Utilities (+18bps to 2.08% m/m), Miscellaneous Goods & Services (+21bps to 2.11% m/m), Health (+4bps to 1.89% m/m), and Recreation & Culture (+2bps to 0.69% m/m) sub-baskets.
However, prices slowed across Restaurant & Hotels (-72bps to 2.10% m/m), Transportation (-19bps to 2.47% m/m), Clothing & footwear (-11bps to 1.86% m/m), Furnishings & Household Equipment Maintenance (-6bps to 1.56% m/m), Communication (-2bps to 0.15% m/m), and Education (-2bps to 1.96% m/m) sub-baskets. As a result, on a year-on-year basis, the core index rose by 53bps to 29.28% y/y (November: 28.75% y/y).
Outlook: Consumer Prices Set to Moderate; Rebasing May Accelerate Disinflation
Price pressures are poised to ease in the near term after four consecutive months of increase. The moderation is expected to stem from a high statistical base induced by the sharp depreciation of the naira, particularly in Q1-24. For clarity, we anticipate the stability of the naira in recent weeks to result in slower price increases on a month-on-month basis in Q1-25 relative to the same period last year, where m/m inflation averaged 2.94%. This could lead to a lower y/y inflation rate in Q1-25.
We anticipate a slowdown in food inflation in January 2025, driven by slower price increases for imported food and reduced consumer demand. These factors may counterbalance the impact of lower agricultural output as the harvest season tapers off. Consequently, we expect food inflation to moderate further to 2.55% m/m in January 2025, pushing the y/y rate down to 38.94%.
Similarly, we expect core inflation to ease due to the reduction in PMS prices and a lower exchange rate pass-through on non-food items. Therefore, we expect core inflation to settle at 1.81% m/m, lowering the y/y rate to 28.01%.
Overall, we expect the headline inflation to slow further to 2.22% m/m, leading to a decline in the y/y rate to 34.30%.
We note that the rebasing of the Consumer Price Index (CPI) could introduce a downside risk to our January inflation estimate partly due to proposed weight adjustments.
Precisely, the NBS proposed a reduction in the weight of Food and Non-alcoholic Beverages in the CPI basket to 40.1% (currently 51.8%) while increasing the weight of other core items, including Health (6.1% vs Current: 3.0%), Transport (10.7% vs 6.5%), Information & Communications (3.3% vs Current: 0.7%), Education (6.2% vs Current: 3.9%), Restaurants & Accommodation Services (12.9% vs Current:1.2%) and Personal care, Social Protection and Miscellaneous Goods & Services (3.3% vs Current: 1.7%).
Given that food prices have so far risen at a faster pace and have contributed significantly to the overall increase in inflation due to its weight in the CPI basket, we believe the reduced weight of food in the proposed CPI basket could lower the contribution of food prices to the headline inflation, possibly causing inflation to increase at a slower-than-expected pace.
Cordros
