May 5, 2023/FBNQuest
Today, we take a closer look at the drivers of March’s headline inflation reading, following our initial commentary on the headline reading last month. We see that headline inflation climbed by 13bps to 22.04% y/y in March, after a modest rise of 9bps to 21.91% y/y in February, driven by an acceleration of core inflation by 102bps to a record high of 19.86% y/y in March. We examine some of the specific drivers of the various components, following the Bureau’s recent publication of its price watch series.
Food prices, which remained sticky, increased by 10bps to 24.45% y/y, higher than the 4bps increase to 24.35% y/y in February.
The selected food price watch data for March shows that all 43 food items surveyed recorded y/y price increases. Also, based on a simple unweighted average, food prices increased by 21.7% y/y.
Rising food prices continue to reflect structural flaws, such as insecurity, which has continued to limit productivity in the agricultural sector.
Other well-known issues include low levels of mechanisation, post-harvest losses, and inadequate capacity for food storage and processing.
Additional upward pressure also came from imported inflation, which rose by 6bps to 18.58% y/y in March, slightly higher than the 3bps increase to 18.52% y/y in February.
Imported food prices reflect declining but still elevated inflation in exporting countries as well as downward pressure on the naira exchange rate.
With respect to core inflation, one of the major contributors was the housing, water, electricity, gas and other fuels sub-index (the largest component of core inflation), which increased to 18.19% y/y in March from 18.11% y/y.
Pressures were also visible in the prices of liquid fuels. The Premium Motor Spirit (PMS) price watch shows that the average price paid by consumers rose by 43% y/y to NGN264.3 per litre in March.
We see from the data that unregulated fuels like automotive gas-oil (diesel), and household kerosene saw average price increases of NGN840.1 and NGN1,142.5 per litre respectively.
The Liquified Petroleum Gas (LPG) price watch reveals that the average cost of refilling a 12.5kg cylinder increased by 22% y/y to NGN4,610.5 in March.
Transportation costs continue to be negatively impacted by higher energy prices. We see from the NBS transport fare watch that y/y double-digit growth was recorded for all segments of transport fares in March.
The average price paid by commuters for single-trip bus journeys increased by 21% y/y to NGN648.2, while one-way airfares increased by 60% y/y in March.
The Monetary Policy Committee (MPC) is due to meet later this month. Given the elevated level of inflation, we see the MPC raising the policy rate by c.50bps.
