February 15, 2022/Cordros Report
In our December inflation note (see report: Inflationary Pressure Biased to Downside in the Short Term), we expected the headline inflation to moderate in January after the negative surprise witnessed in December. Our expectation was based on the favourable base effect from the prior year amidst the (1) pre-existing structural issues and (2) increase in gas and diesel prices. In line with our expectations, the headline inflation moderated slightly by 3bps to 15.60% y/y in January 2022. The outturn is 13bps and 10bps higher than Cordros’ estimate (15.47% y/y) and Bloomberg’s median consensus estimate (15.50% y/y), respectively. On a month-on-month basis, headline inflation moderated by 34bps to 1.47%.
Just as we envisaged, food inflation tapered by 57bps to 1.62% m/m in January, after hitting a 55-month high of 2.19% m/m in December 2021. We attribute the price moderation to the dissipating impact of the peak festive-induced demand amidst the pre-existing structural challenges. Accordingly, prices moderated across the Farm produce (1.65% m/m vs December: 2.38% m/m) and Processed food (1.62% m/m vs December: 2.14% m/m) sub-baskets, while the imported food sub-basket rose slightly by 1bp to 1.38% m/m. Notwithstanding, Famine Early Warning Systems Network (FEWSNET) reported that the prices of food crops – rice, maize, sorghum, cowpea, and vegetables – remain above average, given that agricultural activities remain disrupted in the conflict-affected areas.
After the moderation witnessed in the previous month, the core inflation rose by 13bps to 1.25% m/m in January. We attribute the increase to the troika impact of (1) tax increase in line with the 2021 Finance Act, (2) higher energy prices, and (3) lingering FX liquidity challenges. Sifting through the breakdown provided, we highlight that pressure was most significant in the Miscellaneous good & services (+5bps to 1.27% m/m), Restaurant & hotels (+4bps to 1.21% m/m), Communication (+3bps to 0.88% m/m), Transport (+2bps to 1.26% m/m), and Education (+2bps to 1.21% m/m) sub-baskets. On a year-on-year basis, core inflation settled at 13.87%– the highest level since April 2017 (14.75% y/y).
On balance, we forecast headline inflation of 15.45% y/y in February 2022. Consequently, we revise our 2022FY average and year-end inflation base-case projections to 14.75% y/y (previously: 13.64% y/y) and 13.87% y/y (previously: 13.55% y/y), respectively.
