January 17, 2023/InvestmentOne Report

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• Inflation in Nigeria eased for the first time in eleven months according to December Consumer Price Index (CPI) report released by the National Bureau of Statistics. Precisely, headline inflation declined by 13bps to 21.34% y/y, compared to 21.47% y/y printed in November. Meanwhile, inflationary pressures remained elevated and broad based in the period under review as the core and food indices stood at 18.49% and 23.75% respectively. However, the latter witnessed a gradual deceleration which contributed to the decline in year-on-year overall CPI in December. On a month-on-month basis, consumer prices rose by 1.71% in December, 32bps higher than 1.39% recorded in the prior month due to fuel scarcity, festivity, and electioneering spending by major political parties ahead of the fast-approaching general elections.

• In line with recent trend, the closely watched food index made the largest contribution to inflation figures, however, food inflation surprisingly fell to 23.75% y/y from 24.13% y/y in November. On a month-on-month basis, food prices rose by 1.89%, relative to 1.40% recorded in the previous month. According to the report, the uptick in food prices in the month was due to the increase in the prices of fruits, oil & fat, potatoes & tubers, bread & cereals, and fish. In addition, we opine that the yuletide spending in various households contributed to the increase in food inflation in the period under review. More so, the lingering security challenges, poor transportation network and the aftermath of the unprecedented flooding in major food producing parts of the nation are other factors that affected food prices. Imported food inflation was also elevated in the period at 18.35% y/y and 1.47% m/m majorly on the back of FX liquidity constraint and high global food prices driven by supply chain disruptions emanating from the Russia-Ukraine war.

• Elsewhere, core inflation which excludes volatile food prices jumped at a faster pace by 25bps to 18.49% y/y in December, compared to 18.24% y/y in the prior month. Further details from the report revealed that highest increases were seen in the prices of gas, liquid fuel, passenger transport by air, vehicle spare parts, fuel & lubricants, and solid fuel. Additionally, we highlight that the spike in core inflation may not be unconnected to the lingering scarcity of Premium Motor Spirit (PMS) which has left prices elevated and above official pump price in diverse locations in the country. From our analysis, we noted that transport (20.16% y/y and 1.78% m/m), miscellaneous goods and services (18.61% y/y and 1.66% m/m), education (18.42% y/y and 1.66% m/m), health (18.22% y/y and 1.52% m/m), clothing and footwear (17.55% y/y and 1.30% m/m) and housing, water, electricity, and gas (17.52% y/y and 1.47% m/m) all drove the upward movement in the core index. On a monthly basis, core inflation declined to 1.33%, relative to the 1.67% printed in the previous month.
• Going forward, we opine that consumer prices will remain elevated in coming months amid headwinds such as shortage in food production, pass-through effect of high energy prices and lingering FX challenges to mention a few. However, we expect a gradual disinflationary trend which should be primarily driven by a favorable base year effect. We also note that the possible removal of fuel subsidy later in the year poses a major threat to high inflation. On the policy front, we envisage a less aggressive move by monetary policy authorities or perhaps a hold stance; given the moderation in inflation figures and the need to access the impact of previous rate hikes on the economy.