Economy & Market

Domestic Price Pressures to Persist in the Near Term

The National Bureau of Statistics (NBS) released its latest inflation figures earlier today, showing that Nigeria’s headline inflation increased by 150bps to 33.20% y/y in March (February: +31.70% y/y). A deeper dive into the data shows that food inflation rose by 209bps to 40.01% y/y, while core inflation (all items less farm produce and energy) increased by 77bps to 25.90% y/y (February: 25.13% y/y). The inflation print was 30bps and 43bps higher than Bloomberg’s median consensus (32.90% y/y) and Cordros’ estimate (32.77% y/y), respectively. It is worth noting that month-on-month inflation slowed by 10bps to 3.02% (February: 3.12% m/m), partly supported by the appreciation of the naira in the FX market.

Price pressures remained within the food basket, however, at a moderate pace compared to the previous month. Food inflation rose 3.62% in March m/m, a 17bps decline from the 3.79% m/m recorded in February. Whilst supply shortages induced by the depletion of harvest and high logistics costs remained pressure points, we think that the stability of the naira supported the moderation in food price increases in March. In providing further analysis, we note that the appreciation of the naira has lowered production costs for manufacturers of processed foods as prices of imported raw materials have declined. Accordingly, price increases moderated across the Farm produce (-42bps to 3.43%), Processed foods (-10bps to 3.67%) and Imported food (-38bps to 3.86%) sub-food baskets. On a year-on-year basis, food inflation rose sharply by 209bps to 40.01% y/y (February: 37.92% y/y).

Surprisingly, core inflation (all items less farm produce and energy) came in higher than expected, recording a 37bps increase to 2.54% m/m (February: 2.17% m/m). Analyzing the sub-baskets, price pressures were witnessed across Restaurants and Hotels (+83bps to 3.05% m/m), Utilities (+27bps to 2.74% m/m) and Communication (+9bps to 0.20% m/m), partly supported by higher energy prices. However, the impact of the appreciation of the naira was seen across other sub-baskets as prices increased at a slower pace for Miscellaneous Goods and Services (-48bps to 1.60% m/m), Health (-38bps to 1.63% m/m), Furnishings & Household Equipment Maintenance (-38bps to 1.37% m/m). Prices also moderated for the Recreation and Culture (-16bps to 1.16% m/m) and Education (-11bps to 1.49% m/m) sub-baskets.


We anticipate that food prices will remain elevated in April despite the off-season harvest primarily due to food shortages induced by heightened insecurity in the food-belt region. Additionally, we note that the rise in food demand triggered by the Eid-al-Fitr celebrations in April will further heighten price pressures within the food basket. Nonetheless, we anticipate a slight moderation in the rate of food price increases on a month-on-month basis, reflecting the impact of the appreciation of the naira on imported food inflation and reduced logistics costs, supported by lower energy prices, particularly diesel. Consequently, we project a 3.40% increase in food inflation month-on-month, leading to a y/y increase of 174bps to 41.75% in April.

In projecting inflation for the core basket, we consider some factors, including (1) the appreciation of the naira and (2) the 231.0% hike in electricity tariff to N225.00/kwh for Band A consumers. Based on the former, we note that the naira has gained 11.9% in the past few weeks in April and is expected to remain stable, supporting moderate price increases in the core baskets. On the latter, we highlight that the Band A areas are primarily classified as urban areas due to the high level of commercial and industrial activities in the area. Therefore, we point out that the hike in electricity tariffs for the Band A areas (which get a minimum of 20 hours of electricity supply) will put upward pressure on prices in the urban region. Therefore, we expect the impact of the hike in electricity tariff to offset the gains from the impact of the appreciation of the naira on overall core inflation. As a result, we forecast core inflation to edge higher by 3.02% m/m, cascading to a y/y increase of 196bps to 27.86% in April. Generally, we expect headline inflation to tick higher by 25bps to 3.27% m/m, pushing the y/y inflation to 34.98% in April.


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