Food inflation accelerated for the third consecutive month in November, rising by 5bps to 2.98% m/m (October: 2.94% m/m). We attribute the higher food prices to the effects of the persistent structural challenges undermining the agricultural sector’s productivity, including (1) widespread flooding disrupting farming activities, (2) conflict in the Northern region limiting agricultural operations, and (3) rising input costs constraining harvest yields below historical averages, all of which have kept agricultural food prices elevated. Overall, prices increased across Farm produce (+16bps to 3.11% m/m) and Processed foods (+2bps to 2.95% m/m) sub-baskets, while Imported food sub-basket (-10bps to 3.27% m/m) moderated. On a year-on-year basis, food inflation rose by 77bps to 39.93% in November (October: +39.16% y/y).

Elsewhere, core inflation (All items less farm produce and energy), moderated by 30bps to 1.83% m/m (October: 2.14% m/m) driven by the slower increases in Restaurant & Hotels (-64bps to 2.83% m/m), Miscellaneous Goods & Services (-47bps to 1.90% m/m), Transport (-33bps to 2.67% m/m), Education (-31bps to 1.98% m/m), Furnishings & Household Equipment Maintenance (-27bps to 1.62% m/m), Recreation & Culture (-23bps to 0.68% m/m) and Communications (-17bps to 0.17% m/m) sub-baskets, while prices increased across Clothing and Footwear (+18bps to 1.97% m/m), Utilities (+4bps to 1.89% m/m), and Health (+2bps to 1.85% m/m) sub-baskets. However, on a year-on-year basis, non-food prices increased by 38bps to 28.75% y/y, reflecting the combined impact of the (1) persistent naira weakness, (2) elevated energy costs and (3) high business operational expenses.

Outlook: Festive-Induced Demand to Pressure Prices Amid Naira Appreciation  

We acknowledge that the naira has appreciated so far in December, averaging NGN1,587.48/USD compared to NGN1,667.41/USD in November, driven by improved FX liquidity. However, while the stronger naira may reduce the exchange rate pass-through on consumer prices, other inflation drivers remain significant, including (1) higher consumer demand induced by the festive season, (2) below-average agricultural harvests, and (3) elevated energy and transportation costs. These factors could outweigh the impact of the stronger naira, potentially driving headline inflation higher in December.

Consequently, we anticipate food inflation to increase by 3.16% m/m in December, pushing the year-on-year number higher to 40.52%. At the same time, we project core inflation to rise by 2.07% m/m, with the year-on-year number settling at 28.27%. Overall, we estimate the headline inflation to increase by 2.67% m/m, translating to a y/y print of 35.1% in December.

Figure 1: Headline Inflation – Historical and Forecast (y/y)