June 15, 2023/Cordros Report
Nigeria continues to grapple with rising inflationary pressures as the headline inflation rate maintains an upward trajectory for the fifth consecutive month. This persistent trend can be attributed to a combination of factors, including lingering food shortages and the passthrough impact of transport costs and currency pressures. Accordingly, the National Bureau of Statistics (NBS) revealed that consumer prices increased by 19bps to 22.41% y/y (April: 22.22% y/y) triggered by the increase in the food basket (+21bps to 24.82% y/y) amidst a base-effects induced moderation in the core basket (-7bps to 20.06% y/y). The inflation tally was 6bps higher than Cordros’ estimate (22.35% y/y) and 31bps higher than Bloomberg’s median consensus estimate (22.10% y/y). On a month-on-month basis, the headline inflation rose by 3bps to 1.94% (April: 1.91% m/m) – higher than the 5M-23 average (1.86% m/m).
In May, food inflation advanced to its highest level since September 2005 (29.50% y/y), rising by 21bps to 24.82% y/y relative to April (24.61% y/y). The preceding was in line with our expectations as we expected the food demand-supply gap to remain wide in the review period due to the commencement of the planting season in the northern parts of the country amidst a below-average off-season harvest. Aside from that, we also attribute the continuous increase in food prices to the (1) security challenges in major food-producing states and (2) higher prices on input costs. Consequently, we highlight that prices were higher across the farm produce (+40bps to 24.24% y/y), processed food (+16bps to 25.00% y/y) and imported food sub-baskets. Likewise, on a month-on-month basis, food prices rose by 6bps to 2.19% (April: 2.13% m/m) – the highest level in 17 months.
On the other hand, the non-food inflation eased by 7bps to 20.06% y/y in May (April: 20.13% y/y), primarily due to the favourable base effects from the prior year. Meanwhile, on a month-on-month basis, the core inflation increased by 36bps to 1.81%, as higher prices in the health (+16bps), recreation (+7bps), and furnishing & household equipment maintenance (+9bps) sub-baskets neutered the lower costs of transport (-5bps), utilities (-4bps), and education (-14bps).
Outlook
We expect the upward pressure on food prices to remain in June as the below-average off-season harvest amidst the ongoing planting season continues to widen the food demand and supply gap, more so that we expect Salah celebrations to induce high food demand. Also, we expect currency pressures to stoke imported food prices, while high intra-state transport costs arising from PMS subsidy removal is likely to have a passthrough impact on food prices. Sequentially, we expect food prices to rise by 3.49% m/m in June.
The month of June presents new factors that will exert pressure on the already pressured core basket. These factors include; (1) PMS subsidy removal and (2) liberalisation of the FX market. Notably, we understand that transport costs have settled higher at an average increase of between 50.0% and 100.0% since the NNPCL effectively announced fuel subsidy removal, increasing prices by c. 175.0% on 31 May. In addition, on 14 June, the CBN announced the abolishment of the multiple FX windows, collapsing all of its multiple rates into the Investors and Exporters Window (IEW). Consequently, we expect to see the direct impact of the two key reforms in the transport and utilities basket and indirect effects on the other components of the core basket. Aside from these, we highlight that the effects of tax increase in line with the 2023 Finance Act and the newly amended 2023 Fiscal Policy Measures will add further pressure on the core basket. Consequently, we forecast core inflation to rise by 3.61% m/m.
On a balance of factors, we forecast consumer prices to rise by 3.62% m/m in June, translating to a 217bps increase in the y/y headline inflation rate to 24.58%.
Overall, given the inflation triggers arising from the effective PMS subsidy removal and floating of the currency, we now expect consumer prices to rise steadily over the rest of the year, more so that the month-on-month increases are likely to be higher than the corresponding periods of the prior year. Accordingly, we now expect headline inflation to average 25.11% y/y in 2023E (2022FY average: 18.77% y/y) and end the year at 29.23% y/y (December 2022: 21.34% y/y) on our base case estimates.
