Inflationary Pressure, Weaker Purchasing Power

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February 22, 2024/Coronation Research

Inflationary pressures continue to grip Nigeria’s economy. According to recent data released by the National Bureau of Statistics (NBS), headline inflation rose by +98 bps, reaching a staggering 29.9% y/y. This uptick was mirrored in the month-on-month figures, where headline inflation increased by +35 bps to 2.64%. One of the primary drivers is the exponential rise in food prices, which recorded an increase of +148 bps to 35.41% y/y. Essential commodities such as bread, cereals, oil, meat, and fruits witnessed substantial price hikes, amplifying the burden on consumers already grappling with economic uncertainties.

Core inflation, which excludes volatile food and energy prices, also experienced an uptick, rising by +53 bps to 23.59% y/y. Various sectors felt the heat of inflation, including transportation, medical services, housing, and pharmaceutical products, reflecting the pervasive nature of rising prices across the economy.

The housing and transport segments witnessed particularly sharp increases, with housing-related expenses soaring by 24.7% y/y and 2.1% m/m, while transport costs surged by 25.9% y/y and 1.3% m/m. Such substantial hikes in essential expenses directly impact consumers’ purchasing power, constraining their ability to spend on discretionary items and affecting overall consumption
patterns.

In January ’24, the price increases recorded in the health segment were 2.2% m/m and 24.6% y/y. Pharmaceuticals and medical services have repeatedly featured as leading drivers of core inflation. Furthermore, last month, increases of 0.4% m/m and 8.6% y/y were recorded for the recreation and culture segment within the inflation basket. Despite the general weakening in purchasing power, anecdotal evidence points towards visible appetite for outdoor activities.

Meanwhile, Nigeria’s hospitality industry (similar to some other sectors) is currently experiencing economic scarring. Hotels listed on the Nigeria Stock Exchange recorded profit in 2023. In January, price increases of 1.6% m/m and 24.2% y/y were recorded in restaurants and hotels segment.

Inflationary pressures are further compounded by structural issues plaguing the economy, including high logistic costs, inadequate infrastructure, storage challenges, exchange rate fluctuations, elevated costs of petroleum products, and insecurity, particularly in food-producing regions. These underlying structural impediments contribute to supply chain disruptions, thereby exerting upward pressure on prices.

The CBN/MPC faces the daunting task of curbing inflation while fostering economic stability, a rate hike is widely expected at the impending monetary policy committee meeting, scheduled for next week. As inflation erodes purchasing power, investors tend to demand higher yields to compensate for the diminished real returns on fixed income securities. Consequently, fixed income market rates, such as bond yields, tend to rise in response to heightened inflation expectations, reflecting the increased risk premium associated with lending in an inflationary environment.

On a separate note, businesses operating in this challenging  macroenvironment should prioritize cost management initiatives to mitigate the adverse effects on profitability. This may entail streamlining operations, optimizing supply chains, and renegotiating contracts to contain expenses. Furthermore, remaining vigilant and agile in responding to market dynamics by leveraging market intelligence to identify emerging trends and consumer preferences is important. Diversification strategies, both in terms of product offerings and market segments, can help mitigate risks associated with inflation-induced volatility in specific sectors.

On the policy front, prudent fiscal management and targeted interventions are crucial to alleviate the burden on consumers, particularly the most vulnerable
segments of society. Implementing social safety nets, such as cash transfer programs and food subsidies, can provide relief to households grappling with soaring prices, thereby mitigating the adverse socio-economic impacts of inflation.

Poverty levels are projected to increase in 2024, with concerns surrounding subdued consumer spending and purchasing power persisting unabated. This
scenario is exacerbated by the absence of a proportional augmentation in wages (and in some cases, salaries), which would ordinarily serve as a counterbalancing mechanism to alleviate the inflationary strains exerted upon the economy.

Looking ahead, inflation is projected to remain elevated at double-digit levels, modest declines are expected but driven by favorable base effects and stringent monetary policies.

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