June 16, 2023/InvestmentOne Report

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• Inflationary pressures remained on the high in the Nigerian economy as seen from the latest CPI report released by the National Bureau of Statistics (NBS) for the month of May. In detail, headline inflation edged higher by 19bps during the month, to 22.41% y/y from its April print of 22.22% y/y.We opine that the upward movement can be attributed to the hike in food prices driven by persistent food scarcity, higher energy costs and general increase in the cost of goods and services. On a month-on-month basis, headline inflation inched up by 3bps to settle at 1.94%.
  

• As per the norm, food inflation continued to increase and as a result, the food index recorded an increment of 24.82% y/y in May, 21bps higher than the 24.61% y/y recorded in April, while on a month-on-month basis, it moved higher by 6bps to 2.19% in May, compared to its 2.13% increase recorded in April. According to the report, the increase in food inflation can be attributed to the advance in prices of Oil and fat, Yam and other tubers, Bread and cereals, Fish, Potatoes, Fruits, Meat, Vegetable, Spirit.
  

• However, core inflation, which excludes volatile food prices exhibited resilience in the face of the price pressures observed in the food index, showing a slight decline of 8bps to 20.06% y/y in May, from the 20.14% y/y figure reported in April. We highlight that despite the slowdown in core inflation, pressures remain elevated, driven by significant price increases in categories such as gas, liquid fuel, passenger transport by air, solid fuel, medical services, and vehicle spare parts.
  

• Going forward, we expect inflation to remain stubbornly high in the near to medium term, driven by elevated pressure on the food index as challenges facing food production persist. Furthermore, we envisage a significant increase in energy prices, stemming from the elimination of fuel subsidy by the new government, which has already translated to higher cost of PMS prices across various parts of the country.
  

• Consequently, we anticipate further policy tightening measures by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) given the expected significant jump in inflation which would necessitate the need to incentivize investors by reducing the negative real return on investments.