Headline inflation remains elevated in July as the haunting currency devaluation, higher PMS prices, and food shortages continue to pressure consumer prices. Accordingly, the Consumer Price Index (CPI) data reported by the National Bureau of Statistics (NBS) revealed that consumer prices increased by 129bps to 24.08% y/y (June: 22.79% y/y). Parsing through the breakdown year-on-year, we highlight that prices were higher across the food (+173bps to 26.98% y/y) and core (+41bps to 20.47% y/y) baskets. The inflation reading surpassed Cordros’ estimate (23.49% y/y) and Bloomberg’s median consensus estimate (23.60% y/y) by 59bps and 48bps, respectively. On a month-on-month basis, the headline inflation rose by 76bps to 2.89% (June: 2.13% m/m).

Food inflation sustained its uptrend, surging by 106bps to 3.46% m/m relative to 2.40% m/m in June. We attribute the increases in food prices to a combination of factors, including the: (1) impeding effect of rising logistics costs and currency devaluation on the food index, (2) dry spell season in the northern region as the rainfall was insufficient in the period, and (3) flood incidence in the southern region of the country. On the latter, Famine Early Warning Systems Network (FEWSNET) revealed that flooding in Ondo, Oyo, Osun, Ekiti, Rivers, and Cross River states in early July negatively impacted crop output and infrastructures. Based on the preceding, the prices increased across the Farm produce (+98bps to 3.40% m/m), Imported food (+36bps to 2.11% m/m) and Processed food (+108bps to 3.47% m/m) sub-baskets. Likewise, on a year-on-year basis, food inflation rose to a new record high, increasing by 173bps to 26.98% (June: 25.98% y/y) – its highest print since September 2005 (29.47% y/y).

Similarly, the non-food basket advanced to its highest level since May 2016 (2.72% m/m), rising by 46bps to 2.20% m/m in July (June: 1.74% y/y). We believe the increase was due to the lingering impact of the PMS subsidy and FX reforms in the review period. Consequently, price pressures were most significant in the Transport (+40bps to 2.80% m/m) and Utilities (+99bps to 2.60% m/m) sub-baskets. Meanwhile, given that the PMS prices are now volatile due to the removal of gasoline subsidies, we highlight that the NBS has changed its definition of core inflation to ‘All items less farm produce and energy’ (previously: ‘All items less farm produce’). In line with this, the core index increased by 34bps to 2.11% m/m, translating to a year-on-year increase of 41bps to 20.47%.

Outlook

While we acknowledge the federal government’s implementation of the following measures in moderating food prices – (1) utilisation of funds saved by lifting the fuel subsidy to distribute fertiliser and staple foods to farmers and vulnerable households, and (2) a national flood alert and response plan for 14 affected states to avert damages ahead of the peak flooding period – we still expect food prices will remain elevated in August. Our prognosis is hinged on the continuous spillover effects of the elevated fuel prices and currency pressures on food prices in conjunction with the ongoing lean season in food-producing states. Sequentially, we expect food prices to rise by 3.36% m/m in August.

We expect the volatility in the non-food basket to remain in the coming months given these existing factors: (1) deregulation of petrol prices and (2) local currency depreciation. On (1), Oil marketers under the aegis of the Independent Petroleum Marketers Association of Nigeria (IPMAN), hinted that the cost of PMS would rise to the range of NGN680/litre and NGN720/litre in the coming weeks if the dollar continues to trade from NGN910 to NGN950 at the parallel market. They also stated that dealers seeking to import PMS were being forced to put their plans on hold due to the scarcity of foreign exchange to import the product. Accordingly, the balance of risk is tilted to further price increases. However, we think there is a fair chance that the government may consider temporarily halting further price increases to reduce consumer pains. Overall, we forecast the non-food inflation to rise by 2.72% m/m.

All told, we see a 3.10% m/m headline inflation in August, translating to a 150bps increase in the y/y inflation rate to 25.70%.