February 16, 2022/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 declined albeit marginally by 3bps to 15.60%, starting another round of descent although expected to be short-lived. Save for the uptrend in the December Inflation arising from festive induced factors, the current disinflation continues to see favourable support from the high base in the corresponding period last year. Specifically, the food inflation tapered by 24bps while the core basket remained flat. Monthly, inflation was down by 34bps to 1.48%, indicating that the elevated consumer demand, which significantly outweighed supply during the yuletide, spooking inflationary pressures, is beginning to subside.

At a 16-month low, food inflation printed 17.13% in January, gradually reaching the 16.0% level. On a m/m basis, the food basket declined by 57bps to 1.62%. We believe it benefited from the easing of heightened demand in the festive period and gains associated with the harvest season, especially for major consumer staples such as Rice, Beans and Yam with the harvest period between September and December. On the other side, the core inflation remained at 13.87% y/y in January. On a m/m basis, the core basket rose by 13bps to 1.25%. Major increases in the core basket came from the price of utilities (gas, fuels & electricity), clothing, transport-related costs and pharmaceutical products.

At a time when major economies remain concerned over the direction of the inflation rate, the descent in inflation for Nigeria still gives more room for the government to consolidate economic recovery while paying attention to the global central bankers as they intend to normalize interest rates in the near term to tame inflation while sustaining economic growth. Looking ahead, we project inflation to maintain its descent in February, still supported by the high base effect in the prior period. Given the current downward inflationary trend, we believe the CBN may still want to adopt a “wait and see” approach, thus maintaining a hold policy rate at the next MPC meeting in March. However, a downside risk to our inflation expectation in February is the current fuel scarcity, which, if allowed to persist, may become a pressure point, bringing add-on inflationary pressures.