July 17, 2023/Cordros Report
According to the data released by the National Bureau of Statistics (NBS), Nigeria’s headline inflation surged to a new 18-year high, rising by 38bps to 22.79% y/y in June (May: 22.41% y/y). However, we note that the inflation print is below our expectation following the surprise month-on-month moderation in the core basket (-7bps to 1.74% m/m). Precisely, the outturn is 179bps and 21bps lower than Cordros’ estimate (24.58% y/y) and Bloomberg’s median consensus estimate (23.00% y/y), respectively. Analysing the breakdown, food prices increased by 43bps to 25.25% y/y, while the core inflation advanced by 22bps to 20.27% y/y baskets. On a month-on-month basis, headline inflation rose by 19bps to 2.13% y/y.
Food inflation increased by 21bps to 2.40% m/m in June (May: 2.19% m/m) – higher than the 6M-23 average (2.13% m/m) and the highest level since May 2017 (2.54% m/m). As the existing structural factors stoking non-food prices remain dominant in the review period, we highpoint new triggers in June that exerted pressures on the index, including the (1) passthrough effect of the higher logistic costs on food prices, (2) festive-induced higher demand accompanied by the salah celebration, (3) effects of the lingering currency pressures on imported food and fertiliser prices, and (4) crop infestation in the northern region of the country. On crop infestation, Famine Early Warning Systems Network (FEWSNET) disclosed that tomato production in significant areas in the north was below average due to the Tuta absoluta crop infestation. For instance, we understand that the insect pest infected over 300 hectares of farmlands in Kano state, affecting the dry harvest season. Consequently, price pressures were significant across the farm produce (+37bps to 2.42% m/m), processed food (+16bps to 2.39% m/m) and imported food (+28bps to 1.74% m/m) sub-baskets. Similarly, on a year-on-year basis, food prices printed higher by 43bps to 25.25% y/y (May: 24.82% y/y).
Unexpectedly, the core inflation moderated by 7bps to 1.74% m/m in June, despite price increases across all the sub-indices that make up the core inflation. We are unclear on the reasons for the slowdown in core inflation given the c.175.0% PMS price increases in the review period and currency pressures that accompanied CBN’s abolishment of its multiple FX windows. To give a better context, when PMS prices increased by 111.5% to NGN184.00/litre in May 2016, the core inflation rose by 104bps to 2.72% m/m. Likewise, the core inflation surged by 331bps to 3.48% m/m in January 2012, when PMS prices rose by 33.9% to NGN87.00/litre. Besides, we highlight that the trend in utilities (+20bps to 1.61% m/m) and transport costs (+22bps to 2.41% m/m) did not change much relative to prior months before PMS subsidy removal, which we find puzzling considering the significant movement in PMS prices in the review month. Nonetheless, on a year-on-year basis, the core basket rose by 22bps to 20.27% y/y (May: 20.06% y/y).
Outlook
We expect pressures on food inflation to remain intact in July, as higher transport costs will likely continue to filter into food prices. In addition, we understand that Russia is considering terminating the Black Sea grain deal (which expires on 17 July) as part of the agreement concerning the country is yet to be fulfilled. Accordingly, we expect the preceding to pose further risk to imported food prices in the near term. Finally, July marks the beginning of the lean season in the north amid high flooding in the southern region. Thus, the food demand-supply gap is likely to remain wide. Therefore, we expect food prices to rise by 2.10% m/m in July.
While we acknowledge that the new administration has suspended the implementation of the 2023 Finance Act till September 2023, we still expect the core baskets to remain under pressure. Notably, given that the impact of the FX and fiscal reforms did not reflect much in June’s core inflation reading, we suspect that core inflation will likely rise faster in July. Consequently, we forecast core inflation to settle at 2.59% m/m.
Overall, we expect the pressure on consumer prices to remain skewed to the upside in the near term. Sequentially, we forecast the headline inflation to settle at 2.39% m/m in July, translating to a 70bps increase in the y/y inflation rate to 23.49%.
