Culled—Proshare

June 4, 2020

By FBNQuest Research                                                                                 

Today we turn our attention to inflation. The headline rate has recorded steady upticks since September 2019. The highest increase was seen in October with 36bps while February, March and April 2020 registered increases of 7bps, 6bps and 8bps respectively. Food inflation remains the primary driver of acceleration for the headline rate. The prices of specific food items rose on the back of the country’s land border closure in Q3 2019. Additionally, given the restrictions to movements (including disruptions to the transportation of food items from farms to markets) due to the current Covid-19 pandemic, there have been further food supply shocks.                                                                                                        

The general softness in household demand due to the current economic downturn would generally result in reduced prices of specific items (including food items). However, due to difficulties with securing many agricultural products as well as food items, cost-push inflation has kicked in. The transmission effect of the steady upticks in food price inflation has been quick across markets in the country.

The transport segment, which accounts for 6.5% of the total inflation basket, showed price increases of 1.0% m/m in April, compared with 0.8% the previous month, and 9.8% y/y, compared with 9.5%.

A separate report from the National Bureau of Statistics shows that the average fare paid by commuters for bus journeys within cities increased by 8.2% m/m and 22.4% y/y in April. Zamfara, Abuja and Kebbi states recorded the highest increases.

We expected the decline in crude oil prices to result in the reduced cost of imported petroleum products, and by extension lower transportation fares. However, the social distancing instructions (i.e. reduced number of passengers per vehicle) on the back of the pandemic has led to increases in mass transportation costs.

The segment categorised as housing, water, electricity, and gas and other fuels, the largest component of the core measure, recorded a price increase of 7.8% y/y in April, unchanged from the previous month. The implementation of the review of the electricity tariff has been deferred to 2021.

Meanwhile, health showed price increases of 1.0% m/m and 10.3% y/y in April. Pharmaceuticals and medical services are both components of the health segment, and both have predictably featured as primary drivers of core inflation over the past three months.

At its latest meeting, the monetary policy committee expressed its concerns around heightened inflationary pressures. It argued that the recent increase in pressure is largely due to a combination of factors, including: disruptions in supply chains owing to restrictions on inter-state travels; the reduced domestic supply of foreign exchange; the continued impact of the deteriorating domestic infrastructure; and the spillover effects of Covid-19. If pressed, we could add insecurity in food growing areas.