According to the data released by the National Bureau of Statistics (NBS), headline inflation rose to a new record high, increasing by 172bps to 25.80% y/y in August (July: 24.08% y/y) – the highest level since August 2005 (28.21% y/y). In line with our expectations, the elevated consumer prices were influenced by the lingering impact of the naira devaluation and higher PMS prices amid the unfavourable base effects from the prior year. Thus, the breakdown provided showed that food prices (+235bps to 29.34% y/y) rose to their highest level in 18 years, while the core inflation rose faster by 67bps to 21.15% y/y. The inflation print was 10bps higher than Cordros’ estimate (25.70% y/y) and 80bps higher than Bloomberg’s median consensus estimate (25.00% y/y). On a month-on-month basis, the headline inflation printed higher by 29bps to 3.18% (July: 2.89% m/m).

Unsurprisingly, food prices increased by 41bps to 3.87% m/m (vs July: 3.45% m/m) as these underlying factors – (1) the passthrough effect of elevated PMS prices on food prices, (2) higher input costs, and (3) conflicts in the Northern region of the country – remain intact. Coupled with the above, the closure of the Niger Republic border in early August exerted fresh pressures on the food basket amid the lean season in food-producing states. Consequently, pressures were significant in the farm produce (+49bps to 3.89% m/m) and processed food (+39bps to 3.86% m/m) sub-baskets. On a year-on-year basis, food prices rose by 246bps to 29.07%, partly driven by the low statistical base effects from the prior year in addition to the factors mentioned earlier.

The non-food basket increased slightly by 1bp to 2.21% m/m in August (July: 2.20% m/m) as the Utilities (+36bps to 2.96% m/m) and Health (+27bps to 2.29% m/m) sub-baskets witnessed the most significant price pressures, while prices moderated in the Transport (-49bps to 2.31% m/m), Education (-34bps to 1.09% m/m), and Communication (-6bps to 0.17% m/m) sub-baskets. Elsewhere, the core inflation (All items less farm produce and energy) rose by 7bps to 2.18% m/m in August, translating to a year-on-year increase of 67bps to 21.15%. The preceding suggests that inflationary pressures remain broad, partly influenced by the lingering currency pressures and increase in money supply (+25.6% year-to-date).

Outlook

While September marks the beginning of the primary harvest season, we highlight risks that could impede an increase in food supplies. According to the Famine Early Warning Systems Network (FEWSNET), the North-Central and North-Eastern parts of the country experienced significant rainfall deficits in July and August, likely negatively impacting food production prospects during the harvest season. Simultaneously, September coincides with the annual flooding experienced in the country for the past few years. Notably, the Nigeria Hydrological Services indicated that 178 Local Government Areas (LGAs) in 32 states and the Federal Capital Territory (FCT) were in high danger of severe flooding. We expect the risks highlighted in combination with lingering increases in PMS prices and higher inputs to limit the gains from the harvest season. On balance, we forecast food inflation to rise by 2.60% m/m, translating to 30.82% y/y in September.

We expect the pressure on non-food inflation to remain intact as existing factors stoking prices have intensified. Notably, we highlight that currency pressures have worsened as the FX demand and supply dynamics remain the same at the official and unofficial FX markets. Consequently, we expect the non-food inflation to settle at 2.24% m/m.

Based on our expectations for the food and non-food prices, we anticipate that the headline inflation will rise by 2.47% m/m in September, with the low base effects from the corresponding period of last year leading to a year-on-year print of 27.18%.

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