WED 18 AUG, 2021-theGBJournal- According to the July Consumer Price Index (CPI) reading released by the National Bureau of Statistics (NBS), the year-on-year headline inflation tapered by 37bps to 17.38% – the lowest in six months.
Dissecting the sub-components on a year-on-year basis, we note a sustained deceleration in the food basket (21.03% y/y vs June: 21.83% y/y) while the core segment (13.72% y/y vs June: 13.09% y/y) resumed uptrend after the moderation recorded in June. On a month-on-month basis, the headline inflation moderated by 13bps to 0.93% m/m – the lowest since March 2020 (0.84% m/m). The headline inflation print is 16bps lower than Cordros’ estimate (17.54% y/y) and 12bps less than Bloomberg’s median consensus estimate (17.50% y/y).
Surprisingly, food inflation snapped a two-consecutive month of increase as it moderated by 25bps to 0.86% m/m (June: 1.11% m/m) – the lowest in four months.
We think the slower m/m increase was due to the impact of green harvest in the country’s southern parts, which outweighed the lean season in the Northern region. The breakdown provided showed that prices of Farm produce (-64bps to 0.62% m/m) moderated to the lowest since October 2015 (0.43% m/m) while the Processed food slowed by -14bps to 0.93% m/m – lowest since February 2020 (0.87% m/m).
In addition to the impact of green harvest, the favourable base effects from the prior year supported the slower increase in the food basket. Accordingly, food inflation moderated for the fourth consecutive month to 21.03% y/y, driven by the Farm produce (-127bps) and Processed food (-66bps) sub-baskets, both of which masked an increase in the prices of Imported foods (+4bps).
Elsewhere, core inflation increased by 49bps to 1.31% m/m – the highest since June 2017 (1.32% m/m). The increase was primarily due to the price pressure witnessed across the HWEGF (+10bps) and Clothing & footwear (+1bp) subbaskets, both of which contribute 47.5% to the total core basket. On a year-onyear basis, the core inflation rose 63bps to 13.72% y/y on account of price pressure witnessed across all the sub-baskets safe for the Health (-7bps) and Processed food (-66bps) sub-baskets.
Outlook
The Northern part of the country continues to experience the lean season as they await the commencement of the harvest season in September. However, the country’s Southern parts continue to enjoy the green harvest, although we note that prospects of flooding could limit the impact in the near term. Besides, security challenges remain elevated in the country, while the increased cost of farming inputs and tools could also constrain activities on farmlands. Sequentially, we see food prices reverse the slow growth experienced in July and trend higher in August. Accordingly, we expect food prices to increase by 1.06% m/m in August, translating to a y/y reading of 20.29%.
Following the CBN’s announcement of halting FX sales to the Bureau De Change (BDC) operators at the end of the Monetary Policy Committee (MPC) meeting on 27th July, the Naira depreciated to as high as NGN525.00/USD while currently trading at NGN515.00/USD at the parallel market (pre-announcement: c. NGN504.00/USD). Although the preceding should slowly pressure the core basket, we expect the blend of (1) FX stability at the IEW and (2) stable fuel prices to keep the core basket in check on a month-on-month basis. Consequently, we forecast core inflation to settle at 0.86% m/m.
Overall, we forecast a 5bps increase in the headline inflation to 0.98% m/m in August, with the favourable base effect from 2020 cascading to a y/y print of 16.95%.- By Cordros Research
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