February 18, 2020/Cordros Report

In our December inflation note, we had argued that consumer prices would firm up, on account of (1) the sustained border closure, and (2) the unfavourable low base. In line with our call, headline inflation rose by 12.13% y/y in January 2020, the highest since April 2018. The outturn is 15bps higher than the prior month (January: 11.98% y/y) and broadly in line with our estimate (Cordros Research est: 12.12% y/y). On a month-on-month basis, headline inflation increased slightly by 18bps to 0.87%.

Outlook 

For February, we expect headline inflation to maintain its upward trajectory, largely on account of continued pressure from food inflation and a low-base driven uptick in core inflation. For clarity, given the recent rise in Boko Haram’s activities in some food-producing states, we project a slight shortage of farm produce, as the populace and farms continue to get displaced. Hence, we forecast a 12bps increase in food inflation to 14.96% y/y. Elsewhere, while exchange rate and PMS price stability should ordinarily drive core inflation downwards, we expect the unfavourable low base to lead to a 9.51% y/y rise in the core basket. Overall, we forecast headline inflation of 12.30% y/y in February 2020.

Over 2020, having assumed (1) upward adjustment in VAT hike, (2) land border reopening in Q1, and (3) the electricity price hike, our analysis suggests average and year-end inflation of 12.77% y/y and 15.35% y/y, respectively

Implications for investment

Still negative for fixed income investors: On an inflation-adjusted basis, yields in the fixed income market continue to trend deeper into negative territory as the gap between fixed income yields and inflation continues to widen. Also, our outlook for yields in short to medium term suggests that yield will remain at par or slightly below current levels.

Click here to read full PDF copy of report