August 16, 2022/CSL Research
The Consumer Price Index (CPI) data released by the National Bureau of Statistics (NBS) showed that headline inflation increased by 105bps to 19.64% in July 2022, in line with our forecast. At this level, inflation is at its highest point in 17 years (from October 2005 to July 2022). Within this period, the closest that came to this level was in January 2017 where the headline inflation rose by 18.72%. In terms of drivers, food inflation remained a pressure point, as it rose by 141 bps, further worsened by a 51bps increase from the core basket. On a monthly basis, inflation expanded by 1.82% m/m.
At a 14-month high, food inflation has maintained the 20.0% level since June, reaching 22.02% in July. On a m/m basis, the food basket grew by 2.04% compared to 2.05% in June. The m/m marginal decline may be reflective of the global downtrend in food prices, as the United Nations’ Food and Agriculture Organization noted a reduction in global food prices in July 2022 due to lower wheat and vegetable oil prices. We continue to link the high domestic food prices to the negative pass-through from higher logistics and haulage costs.
For context, the transport inflation, which has a correlation of c.75% with food inflation, touched a 68-month high of 17.58%, reflecting higher AGO price and higher than normal PMS pump price across the country amidst the low harvest season. On the other hand, core inflation rose by 51bps to 16.26% in July. Monthly, the core basket increased by 1.75% from 1.56% in June. The highest increases were recorded in prices of Gas, Liquid fuel, Solid fuel, Passenger transport by road, Passenger transport by Air, Garments, Cleaning, Repair and Hire of clothing.
We see no respite in inflationary pressures in the near term, at least until early harvest of agricultural produces gain momentum in Q3 2022. We forecast headline inflation to reach 20.54% in August 2022. Petrol marketers continue to sell PMS above the regulatory price of N165/litre and diesel cost remains high, indicating that the pressure on both food and core basket arising from related transport costs will persist. Since the CBN changed to a hawkish position, consumer prices have remained elevated, a reminder that inflation is largely supply driven and there is very little the rate hikes can do to combat inflation before economic growth starts to show strain. That said, we do not rule the possibility of another rate hike by the CBN in the last two meetings of the year especially in a period of aggressive rate hikes among the global Central Banks to curtail inflation.
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