June 16, 2021/CSL Research

Inflation moderates for the second consecutive month mainly due to base effect 

In line with our expectation, CPI data released by the National Bureau of Statistics (NBS) for May 2021 showed that headline inflation moderated by 20bps to 17.9%, the second consecutive month of decline. The moderation was mainly due to the high base from the corresponding period last year. While the food inflation pared by 43bps, the core basket was up by 42bps. Month on month, inflation was up by 5bps to 1.0%, suggesting that the country is still not out of the woods. 

Food inflation remains the pressure point, as the rate increased by 7bps to 1.06% m/m. This continues to reflect the incessant killings from banditry, kidnapping, cattle rustling and insurgency in the food-producing regions of the country. According to Famine Early Warning Systems Network (FEWSNET), a leading provider of early warning and analysis on food insecurity, about 2.1m people are currently displaced across the six North-Eastern states in the country. On a yearly basis, food inflation moderated by 43bps to 22.3% due to the elevated base in the prior year. Despite the moderation, the reading is still significantly higher than the 5-year average of 15.5%.

The core inflation remains stubbornly elevated, increasing by 42bps to 13.16% y/y – the highest reading since April 2017 (14.75% y/y). The increase can closely be linked to the devaluation of the official exchange rate to N410/US$ from N379/US$ and the pressured parallel market FX rate (N505/US$), which had a spillover effect on costs in general. Across the core sub-components, increases were seen in Clothing and Footwear (+32bps), Household Equipment (+35bps), Restaurant & Hotels (+20bps) and Transport (+7bps), the combination of which accounts for 63% of the core Inflation basket.

Outlook 

Inflation is projected to decline in June, supported mainly by the high base effect from the corresponding period last year. Besides, all the major sources of inflationary pressure remain. For one, we expect food inflation to remain elevated, as security challenges continue to threaten agricultural productivity. Beyond this, the Onion Producers and Marketers Association (OPMAN) have announced a halt in the supply of onions and the Amalgamated Union of Food Stuff and Cattle Dealers of Nigeria (AFUCDN) have threatened to cut food supply. On the flip side, barring any negative surprises, we expect the core inflation to remain unchanged in June. Overall, we project m/m headline inflation of 1.15% in June, which translates to a y/y reading of 17.83%.

Market Impact

Fixed Income: Despite the moderation in inflation, we expect sentiments to remain bearish in the fixed income market, as investors continue to demand higher return in a bid to earn positive real returns. Furthermore, between January and May of 2021, we estimate that the government has raised a total of N1.08trn through local bond issuances. This implies 50% of the government’s planned borrowing of N2.14trillion from the domestic market (this excludes the domestic borrowings for the recently approved supplementary budget). These, together with the tight system liquidity will continue to support fixed income yield accretion.

Equities: Domestic investors have been selling down their equity holdings in response to the rising yields in the fixed income market and we do not expect any change in the recent trading pattern given investors do not expect a reversal in the uptick in yields. In our view, trading in the market will remain choppy as investors cherry-pick fundamentally sound stocks.

Please find attached the full report.

Kind regards,

Olaolu Boboye

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