February 16, 2023/InvestmentOne Report

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• Inflation in Nigeria resumed its upward trajectory after slightly slowing down last month, as revealed in the recently released data from the National Bureau of Statistics (NBS). Precisely, headline inflation increased by 48bps to 21.82% y/y, compared to 21.34% y/y printed in December. Meanwhile, inflationary pressures remained elevated and broad based in the period under review as the core and food indices rose further to 19.16% y/y and 24.32% y/y respectively. On a month-on-month basis consumer prices rose by 1.87% in January, 16bps higher than 1.71% printed in December. While the report attributed the rise in the m/m figures to uptick in food and fuel prices, we are of the view that the upcoming general elections and the redesign of the naira note could have played a part in the rise in prices.

• As per the norm, the closely monitored food Index experienced the most significant movement, surging from 23.75% y/y recorded in December to 24.32% y/y in January. On a month-on-month basis, food inflation rose by 19bps to 2.08% in January as against 1.89% in the previous month. potatoes. Furthermore, we believe that the unabating security constraints affecting food production especially in the Northern part of the country may have made further contribution to increasing food prices. Also, the spill-over effect of the fuel scarcity and its impact on cost of transportation could have led to higher prices in the month under review. Imported food inflation increased by 18.49% y/y and 1.50% m/m, which could be attributed to high global food prices emanating from supply chain disruptions and increased import costs due to currency depreciation.
• In a similar trend with headline inflation, core inflation which excludes volatile food prices climbed higher by 67bps to settle at 19.16% y/y in January, compared to 18.49% y/y in the previous month. Additional evidence from the report revealed that major increases were noticed in the prices of gas, liquid fuel, passenger transport by air, vehicle spare parts, fuel & lubricants, and solid fuel. More so, we posit that the uptick in core inflation may not be unconnected to the longer-than-expected scarcity of Premium Motor Spirit (PMS) which has caused a spike in pump price across various parts of the country whilst the price of diesel remains at elevated levels. From our analysis, we noted that transport (21.02% y/y and 1.99% m/m), miscellaneous goods and services (19.11% y/y and 1.70% m/m), education (19.02% y/y and 1.72% m/m), health (18.62% y/y and 1.58% m/m), clothing and footwear (17.48% y/y and 1.34% m/m) and housing, water, electricity, and gas (17.92% y/y and 1.55% m/m) all drove the upward movement in the core index. On a monthly basis, core inflation ascended to 1.82%, compared to the 1.33% observed in the previous month.
• Going forward, we expect a steady rise in consumer price pressures in the short to medium term due to structural and fundamental impediments such as the shortage of food production causing increase in prices of food, persistent insecurity crisis and poor road transportation network, pass-through effect of high energy prices, lingering FX challenges and electioneering activities amongst others. We also opine that the possible removal of fuel subsidy later in the year poses an upside risk to inflation.
• On the policy front, we anticipate that the monetary policy committee (MPC) of the central Bank of Nigeria (CBN) will continue to toe the policy tightening path to reduce the negative real return on investments given that inflation has remained stubbornly high for an extended period. However, we maintain our view that rising inflation in the country is primarily driven by cost-push or supply side factors which might not be responsive to monetary policy.