October 16, 2023/Cordros Report
In our inflation report for August (refer to report: Price Pressures Remain Biased to the Upside in the Near Term), we highlighted that domestic customer prices will remain under pressure following the lingering impact of the FX and PMS subsidy reforms in the economy amid the unfavourable base effects from the prior year. Accordingly, data from the National Bureau of Statistics (NBS) revealed that Nigeria’s headline inflation maintained its uptrend for the ninth consecutive month, rising by 92bps to 26.72% y/y in September (vs August: 25.80%). The breakdown showed that price pressures were significant across the food (+130bps to 30.64% y/y) and core (+69bps to 21.84% y/y) baskets. The outturn was 46bps lower than Cordros’ estimate (27.18% y/y) and 38bps lower than Bloomberg’s median consensus estimate (27.10% y/y). On a month-on-month basis, the headline inflation eased by 108bps to 2.10% (August: 3.18% m/m).
In September, food inflation eased by 141bps to 2.45% m/m (vs August: 3.87% m/m) as the start of the primary harvest season supported food supply in the review month. Indeed, the Famine Early Warning Systems Network (FEWSNET) stated that the early harvest of yams and maize in southern states and maturing crops in northern states in September has helped alleviate food consumption gaps observed through the lean season across most of Nigeria. Subsequently, prices moderated across the farm produce (-177bps to 2.13% m/m) and processed food (-131bps to 2.55% m/m) sub-baskets. Meanwhile, imported food prices (+113bps to 2.71% m/m) were higher, following the lingering currency pressure and the Niger Republic border closure in the period. On a year-on-year basis, food inflation rose to its highest level since August 2005 (38.50% y/y), increasing by 130bps to 30.64%. The low statistical base effects from the corresponding period of last year significantly impacted food prices on a year-on-year basis amidst the existing factors stoking food prices.
The non-food basket (+56bps to 22.10% y/y) remains pressured, and we attribute the higher prices in September to the troika impact of (1) lingering currency pressures, (2) PMS subsidy removal, and (3) higher gas and diesel prices. On (1), we highlight that the naira crossed the psychological threshold of NGN1,000/USD in the parallel market in September. As a result, price pressures were most significant in the Utilities (+69bps to 22.47% y/y) and Alcoholic Beverage (+34bps to 15.68% y/y), Clothing and Footwear (+30bps to 16.07% y/y) and Transport (+8bps to 27.18% y/y) sub-baskets. Elsewhere, the core inflation (All items less farm produce and energy) rose by 69bps to 21.84% y/y in September (August: 21.15% y/y). On a monthly basis, core inflation increased by 5bps to 2.22% m/m.
Outlook
We expect food prices to temper in October as food supplies are expected to increase in line with the primary harvest season. However, we highlight factors that could limit the supplies of food produce relative to historical averages – (1) incidence of flooding in food-producing states, (2) effects of below-average planting season on primary harvests, and (3) lingering security challenges in the country’s northern region. Elsewhere, the lingering increase in transport costs may also limit the expected price moderation. Nonetheless, we note that this year’s flood incidence has been less severe than in 2022. On a balance of factors, we expect food prices to rise by 1.73% m/m in September.
We expect the pressure on non-food inflation to remain intact as existing factors stoking prices remain intact. Furthermore, while the CBN has lifted the ban on 43 items from accessing FX at the official window to reduce FX pressure in the parallel market, we expect the FX pressures to remain without a significant increase in FX supplies. Accordingly, we forecast the non-food inflation to rise by 2.00% m/m.
We see a 1.90% m/m headline inflation in September, translating to an 83bps increase in the y/y inflation rate to 27.54%. Overall, our baseline expectation is for the headline inflation to average 24.48% y/y in 2023E (2022FY: 18.77% y/y) and peak at 28.32% y/y by year-end (December 2022: 21.34% y/y).
