October 23, 2020/InvestmentOne Report

Please click to download our September 2020 Inflation Update

·         Recently, the National Bureau of Statistics (NBS) released the inflation report for the month of September-2020. Notably, the headline rate rose from 13.22% y/y in August-2020 to 13.71% y/y, the highest since March-2018. This was driven by a 1.48% jump in the month-on-month (m/m) changes in general prices (vs. 1.34% m/m in Aug-2020). Notably, price increases were observed across all components of the index with cost of food being the major driver amid domestic supply shortages. 

·         The food sub-index rose by 16.66% y/y in Sept-2020 compared to 16.0% y/y in Aug-2020. Food prices increased 1.88% m/m (vs. 1.67% in August). In our view, the pressure from the sustained shortfall in domestic food supply relative to the demand, continued closure of land borders and increased input cost fuelled by FX related factors.

·         In terms of the Core inflation for September-2020, we highlight that the sub-index rose by 10.58% y/y vs. 10.52% y/y in August-2020, Also, on a month-on-month basis, pressure reduced to 0.94% (vs. 1.05% in August-2020).

·         During the month of September-2020, average price of Premium Motor Spirit (PMS) disclosed by NBS was up 10.67% y/y to N161.06 per litre. This was due to the persistent pressure in the FX market as well as gradual recovery in oil price. This could have continued to increase the landing cost of PMS.

·         Looking ahead, we reiterate that the outlook for the headline inflation rate remains biased to the upside for the rest of the year despite the suspension of the recent increase in electricity tariffs. Notably, pressures on the food inflation sub-index is likely to continue till the end of the year due to supply shortages, structural bottlenecks, FX challenges and festive demand. Also, the ongoing social unrest across the nation which appears to be disrupting business activities is likely to leave a negative imprint on the headline numbers. Furthermore, high financial system liquidity in Q4-2020 without a commensurate increase in economic output might spike the core index.