Yesterday, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for Sept-22. According to the report, the headline inflation climbed 27bps to settle at 20.77% y/y in Sept-22, from August’s 20.52%, printing below our in-house forecast of 21.30% and Bloomberg consensus estimate of 21.00%. Interestingly, September’s inflation print of 20.77% represents its highest in 17 years. On a m/m basis, the headline CPI rose by 1.36%, 41bps lower than Aug-22’s m/m inflation. Noteworthy to mention, September’s inflation print represents a positive surprise, underpinned by steep m/m disinflation in food prices. That side, aggregate price level remains elevated due to increased cost of imported refined petroleum products, weaker Naira, inadequate food supply, and ripple effect of higher petroleum products prices.

Across the sub-indices, food inflation expanded 3.77ppt to print at 23.34% y/y in Sept-22, from 19.57% y/y in Aug-22. On a m/m basis, the food sub-index moderated by 55bps to 1.43% in Sept-22. Notably, m/m food inflation dipped significantly, likely due to improved food supply caused by early harvests of the crops harvest season which was supported by early rains. That said, legacy inhibitions to food supply such as unabating insecurity challenges in food producing states, increase in the cost of farm inputs (seeds and machinery) & associated logistics costs, and the cost of fertilisers remain pain points for food production and supply.

In tandem, core inflation sub-index rose 40bps to print at 17.60% in Sept-22, from 17.20% as of Aug-22. On a m/m basis, the core sub-index rose 1.59% m/m, the same rate recorded in Aug-22. In line with the current elevated inflation environment, all the components of the core inflation basket trended higher m/m, with the highest increases observed in Transportation, Alcoholic beverages, Tobacco, and Kola, and Miscellaneous goods and services. Increase in core inflation remains primarily driven by weaker exchange rate, broadly elevated petroleum products & energy costs as well as the subsequent impact on transportation costs and providers of services.

Outlook: Troubled waters ahead with little hope of manoeuvre

As we advance into the rest of the year, we maintain our expectation of continued pressure on the general prices of goods and services within the Nigerian economy. We expect extended pressure on the food inflation component, owing to a myriad of factors with perceived direct relationship to the food production output of the Agricultural sector. First, the recent flooding disaster across the middle-belt and several other food-producing states in Nigeria, attributable to the release of excess water from the Lagdo Dam in Cameroon, which cascaded into Nigeria through the River Benue and its tributaries, will stand as a significant impediment to harvesting activities expected during the harvest season. We expect crops that should have been otherwise harvested to be damaged by the flood, resulting in a potential shortage in post-harvest food supply vs the increasing demand for food in the country.

Also, without a doubt, legacy insecurity issues and tribal conflicts in North-Western and North-Central states of the country will remain key pressure points on aggregate food supply. In addition, elevated farm input cost (seeds, fertilisers, machinery etc.), remains a major bottleneck, a resultant effect of the Russia-Ukraine crisis on fertilisers supply chain. On the other hand, we expect food demand to sustain upward momentum with the likelihood of peak demand as we approach the December festivities. Lastly, data from the Foreign Trade report revealed in the last four years to 2021,  the total value of imported food & live animals grew by a CAGR of 27.00%. Further indicating persistent FX shortages and global food supply chain pressures will continue to support elevated imported inflation.

For core inflation, we expect energy costs and FX shortage to remain the most significant concerns. Crude oil and Gas prices have remained elevated despite lingering worries about global oil demand. Although, crude oil price is expected to remain under control, it is likely to remain high in the near term, keeping prices of deregulated products like Diesel, Kerosene and Jet Fuel elevated. The effect of higher petroleum product costs will be magnified by the impact on logistics costs (transportation basket) and Housing & Energy Costs while we expect price of services provided by serviced-based businesses (Education, Recreation & Culture) to surge higher as they navigate a higher operating cost environment.

Also, the recent flooding has compelled Nigeria Liquefied Natural Gas to announce a force majeure, a likely disruptor of cooking gas supply across the country, triggering upward price pressure. Lastly, the pitiable FX situation is likely to continue unabated as inflows from foreign investors and foreign debt issuances are likely to remain subdued. Although, the recent discovery of two illegal pipelines could provide much needed relief for crude oil production, the extent and immediacy of likely impact is unknown and could take as long as three to six months for meaningful impact on crude oil earnings. Thus, FX shortages and a depreciating naira is likely to continue unabated. A confluence of these issues will remain pain points for core inflation.  

Having evaluated the expected inflation drivers, we reiterate our expectations of persistent inflationary pressures. Heading towards the end of the year, we expect the primary driver to be rising food prices as the recent floods will damage crops and cause post-harvest shortages. Overall, we project a 21.4% y/y increase in headline inflation.  

Month-on-month Disinflation…Food for thought for monetary policy

In the most recent Monetary Policy Committee (MPC) meeting, the committee unanimously voted to increase the Monetary Policy Rate (MPR) to 15.5% (+150bps), bringing the cumulative hikes in 2022 to 400bps, further corroborating the committee’s fight against the rising prices. Despite the recent numbers revealing disinflation on a month-on-month basis, the 20.77% y/y print is still the highest it has been since Sep-2005 and still far above the Apex bank’s 6.0% – 9.0% target band. Also, we note that the MPC would maintain keen eyes on FX speculation activities and persistent policy normalisation across the global economy. As such, we rule out the possibility of a dovish monetary policy tilt. That said, we note that the slowed pace of prices increases in September may give committee members confidence that demand-pull inflation drivers may be weakening, leaving cost-push drivers as the main cause of inflation. This could lead to them employing a wait-and-see approach on monetary policy for the rest of the year. However, we retain slight probability of a 50-75bps hike in the MPR before the end of 2022.

For debt market investors, real return continues to remain in negative territory despite the recent upsurge in yields across the yield curve. Rising inflation and mild pace of increase in yields remain primary culprits. However, with the sustained inflationary pressure, the expectation of higher government borrowings, and tighter liquidity dynamics, the yield curve will likely sustain the recent uptrend. Thus, we believe exposure to long-duration debt instruments should be avoided. At the same time, fixed income-obligated investors should retain a preference for short-duration instruments in a bid to manage mark-to-market losses and maximise reinvestment opportunities.