June 13, 2024/FBNQuest Research

Nigeria’s headline inflation continued to rise in April, increasing by 49bps to 33.69% Y-o-Y, according to the inflation report from the National Bureau of Statistics (NBS). On a more positive note, M-o-M readings for headline and food measures decelerated for the second consecutive month to 2.29% M-o-M and 2.50% M-o-M in April (vs. 3.02% M-o-M and 3.62% M-o-M recorded the previous month), an indication that domestic price pressures are gradually slowing. Notably, the modest increase in April was driven by higher food and core readings, which accelerated to 40.53% Y-o-Y and 26.84% Y-o-Y, respectively, from 40.01% and 25.90% Y-o-Y reported in March.

• The continuous rise in food prices can be attributed to supply constraints in the nation’s food sector caused by persistent attacks on farmers in food-growing regions in the country.  
• The pass-through effect from higher transportation costs and the relative weakness of the local currency compared to other foreign currencies on local food items has also contributed to the persistent uptick in food prices.  
• The non-food inflation reading, which includes energy components, increased by 80bps to 26.18% Y-o-Y in April.
• The increase in the non-food index in April was primarily driven by the recent hike in electricity tariffs for Band A users and higher petrol prices resulting from pockets of fuel scarcity nationwide.
• In response to heightened inflationary pressures, the Monetary Policy Committee (MPC) has maintained an aggressive policy stance to rein in stubbornly elevated inflation.
• Citing the need to consolidate its previous efforts in anchoring elevated inflation expectations, the MPC, at its May meeting, voted to tighten policy rates further.
• Consequently, the committee raised the interest rate by +150bps to 26.25%. However, other parameters were left constant.
• Looking ahead, we expect inflationary pressures to remain elevated in the near term, driven by exchange rate depreciation and persistent supply shocks to the country’s food sector.
• However, we expect moderate inflation in the headlines from mid-year, mainly due to base effects.
• On the flip side, potential upward pressure on domestic price levels could stem from the imminent upward review of workers’ wages upon concluding the ongoing negotiations between the government and the labour unions.
• Furthermore, gradually adding electricity users to Band A would result in higher energy costs and could exert additional pressure on the headline reading.
• However, the recent additional payment of US$925m from Afreximbank on the NNPCL crude oil deal is expected to improve FX liquidity soon. It could translate to the relative stability of the Naira exchange rate.
• Given that the exchange rate is the country’s most significant driver of inflationary pressures, the potential appreciation of the Naira poses upside risks to the nation’s inflation outlook.