July 19, 2021/Proshare

by FBNQuest Research 

The June report from the NBS shows a third successive decline in headline inflation, to 17.75% y/y from 17.93% the previous month. Our expectation, shared with the newswires, was a slightly higher rate of 17.85%. Base effects have turned favourable and should remain so until end-year, most of all in Q4. Food price inflation slowed from 22.28% y/y to 21.83%, and core (non-food) inflation from 13.15% y/y to 13.09%.  On a m/m basis, the headline rate actually picked up by 5ps in June to 1.06%, and that for food prices by 6bps to 1.11%.  The monetary policy committee last met in May after just one monthly decline in the headline rate, and felt that it was the first of several. It concluded on the basis of slowing inflation and recovering growth that its policy stance was vindicated (Good Morning Nigeria, 12 July 2o21). The committee next meets on 26 and 27 July. 

The NBS commentary on core inflation notes that the highest price increases included several items that we can tie directly to the lockdown and the FGN’s restrictions in response to it: passenger transport by road and air, motor cars, spare parts for vehicles, pharmaceutical products and medical services.

Imported food prices, which have a 13.3% weighting in the index, rose by 6bps to 17.04% y/y in June. The rate has moved within a range of just 100bps for the past 18 months. This appears surprising in the context of solid global food price inflation, driven largely by COVID-19. Additionally, we recall the exchange-rate adjustments since March 2020 and the difficulty in securing fx, which has led importers to access the parallel market for their needs.  

Our explanation is that importers are reluctant to pass on the full increase in their own costs, given the subdued nature of household demand.   

The NBS inflation reports also provide data by state. The highest headline rate in June was 23.8% y/y in Kogi State, and the lowest 15.2% in Abuja. Kogi also had the highest food price inflation of 30.3% y/y. The bureau cautions that the inflation basket can vary from state to state.

Barring a shock such as another scrapping of retail fuel subsidies or a ‘big bang’ exchange-rate adjustment, we see a slowdown in the headline rate to 16.0% y/y at end-2021. For the July report, our expectation is 17.50%. Positive base effects should be the principal driver, supported, we trust, by the impact of the harvest.

 Consumer price inflation (y/y; % chg)

Sources: National Bureau of Statistics (NBS); FBNQuest Capital Research