October 18, 2021/CSL Research

In line with our expectation, the Consumer Price Index (CPI) data released by the National Bureau of Statistics (NBS) showed that headline inflation further moderated by 38bps to 16.6%, making it the sixth consecutive month of decline. The current disinflation continues to see support from the high base in the corresponding period last year. Notably, the headline inflation (16.6%) in September is coming below the 1-year average inflation rate of 16.8%. Specifically, the food inflation tapered by 74bps while the core basket was up by 34bps. Month on month, inflation was up by 12bps to 1.2%, suggesting that prices are still on the rise.

Food inflation rose by 19.6% in September, snapping the 20.0% levels consistently recorded since the start of the year. However, on a m/m basis, the food basket increased by 20bps to 1.26%, reflecting the snowball effect arising from the unabated insecurity, combined with flooding and lower access to inputs, which overshadowed the benefit of the early harvest
season. Similarly, the core inflation remains stubbornly elevated, rising by 34bps to 13.74% y/y, the highest reading since May 2017. Key contributors to the increase in our view are the depreciation of the FX rate at the parallel market with the consequent rise in the prices of goods and services and the continuous increase in the cost of Liquified Petrol Gas (LPG), widely used by the populace. Evidently, the highest increases were recorded in the prices of gas, household textile, garments, motor car and household appliances. Also, the September school resumption, often characterized by pent up demand with attendant effect on consumer prices, could have been a factor.

Looking ahead, we project inflation to maintain its descent throughout the year, supported
mainly by the high base effect in the prior period and the main harvest season, which should moderate food prices. Nonetheless, security challenges affecting agricultural productivity remain the major downside risk. On the other hand, we expect core inflation to continue to rise as FX pressures and the sustained rise in LPG appear relentless. Beyond this, the current inflationary trend gives additional justification for a hold policy rate at the next MPC meeting, giving enough room to ramp up economic growth.