August 24, 2020/InvestmentOne Report

Please click to download our July 2020 Inflation Update

·         Recently, the National Bureau of Statistics (NBS) released the inflation report for the month of July 2020 which revealed that headline inflation continued its upward trend for the eleventh consecutive month and the highest since April 2018(12.48%). According to the report, headline inflation increased to 12.82% y/y in July 2020 from 12.56% in June 2020.

·         As usual, the food sub index was the main driver of the uptick in headline inflation, rising by 15.48% y/y in July 2020 compared to 15.18% y/y in June 2020. Similarly, on a month on month basis, the sub index rose by 1.52% relative to 1.48% increase in June 2020.

·         In terms of the Core sub index, we highlight that the increase in the sub-index slowed to 10.10% y/y, 3bps slower than the last month change, this may be attributed to the slow transition effect of the current FX challenge on core items as consumer purchasing power remains weak to accommodate the full impact of the current input cost pressures. Similarly, on a month-on-month basis, the increased at a slower pace by 0.75%, 11bps lower than last month’s figure.

·         For the month of August 2020, we have a pessimistic outlook on the downstream oil and gas industry in the near term despite the renewed interest to sign the PIB into law. While the removal of subsidy may be positive for players in the sub sector, we think continuous FX challenges and further recovery in oil price may force PMS Price to be reviewed upward in the near term. This, as usual, may put pressure on overall prices of goods in the economy.

·         Overall, we do not see any relief in sight as pressure on the headline inflation is expected to be sustained as overall fundamentals remain the same. For food inflation, as land borders remain closed and the effect of the planting season remains, we expect the resulting food deficit to persist and continue to pressure prices higher. Similarly, the core sub-index is foreseen to continue to trend northward due to FX illiquidity and potential increase in PMS price. With international flights expected to resume by August 29, we believe FX demand may remain elevated thereby putting more pressure on the Naira. Nonetheless, we expect CBN to increase its participation in the FX market to reduce the pressure on the nation’s currency. However, we believe the increase in retail PMS price from N140.8-N143.8 in July 2020 to N150-N157 in August 2020, may further heighten the headline rate.