August 14, 2023/FBNQuest Research
Except for a brief period of easing in Dec ’22, Nigeria’s headline inflation reading has steadily risen since Feb ’22. The most recent inflation reading for Jun ’23 showed that the headline rate rose by 38bps to 22.79%, notably below the market’s expectation. Today, we turn our attention to the recent drivers of June’s headline inflation reading, following the release of the Jun ‘23 price watch series by the National Bureau of Statistics (NBS). As we reported in our preliminary take on the Jun ‘23 inflation reading, the higher headline reading was driven by both the food and core components which increased by 43bps and 22bps to 25.3% and 20.3% respectively.
Turning to the price watch series, the selected food price watch for June shows that all 43 food items surveyed recorded price increases on a y/y and m/m basis.
An unweighted simple average, which does not account for consumption trends, indicates that the average price of food items in the Bureau’s designated basket increased 27.5% y/y and 6.4% m/m.
The elevated reading for food inflation continues to be negatively impacted by supply-side drivers such as the insecurity in major food-producing areas of the country, high transportation costs and logistics challenges, and the infrastructure deficit.
With respect to core inflation, the housing, water, electricity, and other fuels sub-index (the largest component of core inflation) was up 24bps.
Notably, the average price of premium motor spirit (PMS/petrol) increased markedly by 210% y/y to c.NGN546/litre in June, following the elimination of subsidies on the product in May ’23.
Prices for other fuels, such as the automotive gas oil (diesel), and household kerosene increased by 11.2%y/y and 62.3% y/y to NGN815.8/litre and NGN1,236.1/litr respectively.
The rise in fuel prices, particularly PMS, also resulted in an increase in transportation costs. The average fare paid by commuters for both intra and inter-city bus trips surged by 120.6% and 55.3% y/y respectively.
However, on a slightly positive note, the liquefied petroleum gas (LPG) price watch shows that the average cost of refilling a 12.5kg cylinder decreased by -3.8% y/y to NGN9,123.3.
The exchange rate is one of the single-largest drivers of inflation, with major pass-through to items like petrol and other imported items.
As such, the floating of the naira in June has resulted in a marked acceleration in consumer prices. This is in addition to the removal of subsidies on petrol.
The sustained rise in the headline inflation rate has weakened household consumption and reduced consumer discretionary spending.
At its last meeting held in July, the monetary policy committee (MPC) raised its interest rates by 25bps to 18.75%, in a bid to address the continued rise in headline inflation.
Regardless of the move, we expect the headline rate to accelerate in the coming months as the transmission effect of some of the administration’s policy reforms kicks in.
