March 16, 2023/InvestmentOne Report

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• According to the latest CPI figures from the NBS, inflation rose for the second consecutive month in February. Specifically, headline inflation climbed by 9bps to 21.91% y/y from the January reading of 21.82% y/y. This was primarily driven the slight upward movement in food inflation, while core inflation moderated for the period year-on-year. Month-on-month, headline inflation rose by 1.71%, a decline of 16bps compared to 1.87% in January. Apparently, the intense naira scarcity that was felt in February was significant enough to moderate the pace of price increases compared to the previous month. 
• In line with headline inflation, the food sub-basket also rose for the second straight month, but at a much slower pace. The heavily weighted index rose marginally by 3bps to 24.35% y/y from 24.32% y/y in the prior month. According to the report, the increase in food costs during the month was caused by higher prices for oil & fat, bread and cereals, potatoes, yam and other tubers, fish, fruits, meat, vegetables, and food products. We presume that food prices remained upbeat on the back of lingering insecurity challenges impeding adequate food supplies, the pass-through effect of high transport costs, and panic buying as fears of perceived post-election unrest ensued amongst the populace. The aforementioned factors seemed to have outstripped the possible slowdown in food demand and the drop in price that should follow from the cash crunch hazard, thereby, resulting in the marginal northward movement in food costs relative to the same period last year. However, analysing the numbers from a month-on-month perspective, food inflation rose at a slower pace of 1.90%, 18bps lower than the 2.08% printed in January.
• Contrary to the trend in headline and food inflation, the core inflation sub-index, which excludes volatile food prices, settled at 18.84% y/y in February, down by 32bps compared to 19.16% y/y in January. In the same vein, on a monthly basis, the index declined by 76bps to 1.06%, compared to the 1.82% observed in January 2023. For us, we think the demand for non-food items took a hit owing to the scarcity of cash and the incessant failures of electronic means of financial transactions within the month. In addition, the moderation in FX pressures, the stability in the price of premium motor spirits (petrol) as the chronic fuel scarcity witnessed in January seemed to have abated to a large extent.
• Going forward, we expect a steady rise in consumer prices in the short to medium term due to structural impediments such as shortages of food production emanating from persistent insecurity crisis, the pass-through effect of high energy prices, and lingering FX challenges causing a further increase in food prices. We also anticipate that the circulation of old notes back into the economy will likely stoke consumer demand and mount further pressure on prices in the short term, as well as talks around the removal of fuel subsidy later in the year if eventually actualized.

• On the policy front, given the hawkish rhetoric by the monetary authorities at the last policy meeting, we anticipate that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will continue to toe the tightening path, albeit at a slower pace to temper price pressures. However, we maintain our view that rising inflationary pressures in the country are primarily driven by supply-side factors that might not be responsive to monetary policy.