September 22, 2020/InvestmentOne Report

Please click to download our August 2020 Inflation Update

·         Recently, the National Bureau of Statistics (NBS) the inflation report for the month of August 2020 which revealed that headline inflation continued its upward trend for the 12th consecutive month and the highest since April 2018.

·         The food sub index remained the main driver of the uptick in headline inflation, rising by 16.00% y/y in August-2020 compared to 15.48% y/y increase in July-2020. Similarly, the index rose by  1.67% vs 1.52% the previous month.

·         In terms of the Core inflation for August-2020, we highlight that the sub-index inched up 10.52% y/y vs. 10.10% y/y in May-2020, Also, on a month-on-month basis, pressure went up to 1.05% (vs. 0.75% in July-2020).

·         During the month of August-2020, average price of Premium Motor Spirit (PMS) disclosed by NBS was up 2.26% y/y and 3.62%m/m to N148.78 per litre. According to the Petroleum Product Pricing Regulatory Agency (PPPRA) the government has decided to fully deregulate the Nigerian downstream oil and gas industry and also totally remove fuel subsidy, giving oil marketers total freedom to set PMS price.

·         With the continuous pressure on exchange rate and its attendant impacts on imported finished goods and raw materials, we expect inflation rate to continue to increase. In a twist, and what we believe may be a reaction to dwindling reserves levels, the President Muhammadu Buhari ordered that food and fertilizer importers should not be given access to foreign exchange by the CBN. A move geared towards favouring local farmers and agricultural production. While we believe import substitution, especially in the area of food, should be given high priority in the FG’s policymaking, we are of the opinion that the sudden shock in food supply in the face of weak local production relative to demand may exacerbate the Covid-19 influenced economic hardship on the populace.

·         In our view, the outlook for the headline inflation rate remains biased to the upside for the rest of the year amid recent upward adjustment in electricity tariffs, fuel prices and FX market instability.