August 18, 2021/CSL Research

Consumer prices continue to taper, as headline inflation moderated by 38bps to 17.37%. While the high base was supportive, the food segment of the CPI basket remains the major driver of disinflation. In the same vein, month-on-month inflation tapered by 17bps to 0.91% y/y.

Food inflation (-81bps to 21.0%) continues to surprise positively, despite the incessant killings from banditry, kidnapping, cattle rustling and insurgency in the food-producing regions of the country. We think that the deceleration in food prices was mainly driven by the early harvest season in southern Nigeria (see figure 1).   

The core inflation remains stubbornly elevated, increasing by 62bps to 13.72% y/y – the highest reading since April 2017 (14.75% y/y). The increase can closely be linked to the spillover effect of currency pressure on cost. Also, the rising cost of cooking gas (+20% y/y) continues to reflect on Housing Water, Electricity. Gas and Other Fuel (HWEGF), the largest sub-component of core inflation.

Outlook: We expect inflation to further moderate in August, supported by base effect and early harvest season. On the flip side, we expect pressure on core inflation to persist, but at a mild rate. To validate this claim, contrary to expectations from the Petroleum Industry Act (PIA), the FGN said the retail price of Premium Motor Spirit will remain at N162 per litre until a feasible framework is developed. Overall, we project m/m headline inflation of 1.02% in August, which translates to 17.06% y/y.  

Market Impact: Despite the moderation in inflation, we expect sentiments to turn bearish in the fixed income market, as investors continue to search for higher returns in a bid to earn positive real returns. Furthermore, drop in liquidity and higher a domestic borrowing due to the supplementary budget will continue to support fixed income yield accretion.