August 17, 2022/United Capital Research
The National Bureau of Statistics (NBS) recently published the Consumer Price Index (CPI) report for Jul-22. In line with our in-house projections, headline inflation rose 104bps to 19.6% for the month, with the inflation basket expanding 1.8% m/m. Interestingly, the inflation print of 19.6% in Jul-22 represents the highest level since Jan-2017. In addition, all components of the CPI basket increased. Analysing the inflation sub-indices, price pressures remained across as food inflation rose to 22.0% y/y, but m/m increases, moderated to 2.0% (from 2.1% in June). Also, core inflation remained elevated at 16.3% y/y, and m/m increases climbed to 1.8% (from 1.6% in June).
Despite the marginal moderation in food inflation caused by a slight reduction in prices of some constituent food items such as tubers and cereals, the legacy inhibitions to food supply such as unabating insecurity challenges, low-quality inputs, and supply chain bottlenecks remain. In addition, FX pressures and risks which continue to crystalise affected specific food prices. For context, imported food prices rose 17.9% y/y while the naira depreciated 4.2% y/y to N430.0/$ via the I&E window, however in the parallel markets rates have climbed c. 22.0% y/y to N683/$ . The rise in core inflation was tied to all the components of its basket trending higher; the most significant increases were observed in Clothing & Footwear (+17.7% y/y), Alcoholic beverages(+17.9%y/y) and Transportation costs(+17.6%y/y). The increasing cost of petroleum products underpinned the growth in transportation costs. The average nationwide PMS prices have risen c. 7.0% y/y to N167.5/Litre and average diesel prices have risen c. 202.9% y/y to N735.1/Litre. In addition, the elevated crude oil prices (brent crude has risen 20.5% YTD to print at $95.16/bbl.) continued to impact energy and fuel costs with spillover effects on production costs during the month.
Looking ahead, we remain downbeat about the inflation outlook for Nigeria. We expect food price pressures, elevated energy costs, and a relatively low base for inflation in the prior year will keep the inflation rate elevated. We project the inflation rate will rise to 20.5% % in Aug-2022. We believe this holds significant concerns for monetary policy outlook. A continued uptick in inflation could lead to another rate hike in MPR, which poses some headwinds to a fragile economy. The monetary policy must be cautious when balancing the scales between moderate economic recovery and rising inflation. For equities, we expect continued rate hikes will only support the asset switch in the recent weeks. Lastly, for fixed-income investors, we advise our investors to lock in investments for shorter maturities, following our expectation of sustaining an elevated yield environment.
