July 18, 2022/CSL Research

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• Recently released report from the National Bureau of Statistics revealed that headline inflation maintained the upward trajectory witnessed in previous months.  This marked the fifth-month consecutive increase in the year and the largest gain since December 2016. In specifics, headline inflation accelerated to 18.70% y/y in June – 90bps higher than the 17.71% recorded in May 2022. We highlight that pressure remain broad based given the uptick in Food and Core index. On a month-on-month basis, headline inflation rose at a faster pace from 1.78% in the month of May to 1.82% in the month of June.
• Per the norm, food index remains the biggest driver of the northward movement in headline inflation. As such, food index surged to 20.60% y/y in June – compared to the 19.50% recorded in May. We are of the view that the rise in food prices may not be unconnected to the lean food/produce in circulation given the onset of planting season, elevated global food commodities prices driven by the geopolitical crises and the pass-through impact of high energy prices on transportation cost. In addition, the growing insecurity levels in the food producing part of the country may be limiting farmers ability to plant their desired quantity of crops.
• Similarly, on a month-on-month basis, we saw food sub-index climb to 2.05% m/m (higher than the 2.01% printed in May 2022). In the same vein, imported food sub-index recorded a significant increase of 17.85% (y/y) and 1.42% (m/m) – from 17.70% (y/y) and 1.40% (m/m) recorded in May. This may not be unconnected with the increasing prices of imported food items and the exchange rate depreciation in both the IEFX and black window.
• Core inflation was not immune to the price pressure as the sub-index rose by 15.75%y/y in the month under review, 85bps higher than the prior month’s print of 14.90%y/y. On a month-on-month basis, the index slowed down to 1.56%, 32bps lower than the previous month. We attribute the pressure in the core index to the elevated diesel or energy prices emanating from the geopolitical tensions and the occasional PMS shortages in the country.
• Going forward, we expect inflation to sustain its upward trajectory due to several factors such as the global increase in commodities prices, elevated energy prices and PMS shortages, FX liquidity challenges and exchange rate weakness. In addition, the heightened insecurity levels in the northern part of the country may negatively impact an optimal planting season.  Consistent with the increased money supply associated with the electioneering year, we believe this might further exert pressure on inflation.