Inflation: Higher Energy Costs Could Compound Spiralling Food Prices

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Tuesday, November 17,  2020 / 11:49 AM / CardinalStone Research / Header Image Credit: WeeTracker


The National Bureau of Statistics has reported a 52-bps uptick in inflation to 14.23% YoY, that corroborated the sustained surge in cost of living across the country. The reading was ahead of our 14.02% YoY estimate and consensus forecast of 14.10% YoY. Food inflation (+72 bps to 17.38% YoY) remained the primary driver of the pressures as prices of food staples rose considerably in the review month. Core inflation also advanced by 56 bps to 11.4% YoY. On a month-on-month basis, headline inflation printed at 1.54%, its highest level since June 2017.

 

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At least a duo of factors left food prices on the rise

Consumer prices have risen at a faster pace each month since February, and the trend is showing little signs of tapering. MoM inflation has accelerated from 0.87% in January to 1.54% in October. While the change may appear immaterial at face value, its impact could be significant when extrapolated over 12 months. Precisely, the former would translate to a 10.95% inflation over the next 12 months, while the latter suggests a 20.1% annual change in prices. The worrying trend has been primarily driven by higher domestic food inflation; whose monthly reading (1.96%) is currently at the highest level for 40 months. Unsurprisingly, food products with the steepest price increases were those mainly in the CBN's FX restriction list. These products include oils and fats, meats, vegetables, and cereals. However, the lower imported food inflation (relative to domestic food inflation) may suggest that the FX passthrough to food is mostly indirect. Besides, local food prices may have been affected by recent flooding in rice-producing regions and the lingering impact of land border closures. On the former, Rice Farmers Association of Nigeria estimates that flooding may have washed away over 30% of rice harvests this year.

 

Energy cost pressures to offset seasonal harvest impact

Rising energy costs from higher electricity tariffs and increases in petrol prices are likely to compound the impact of existing currency pressures and weigh on the price environment in the final months of the year. After the initial suspension of electricity tariff hikes for 3-weeks in October, the cost increase (capped at 30%) took effect on 18th October, with the impact on consumer prices likely to manifest in coming months. Additionally, the liberalization of the downstream oil and gas sector has introduced more volatility to fuel costs, which should track movements in global crude oil prices and other key variables. The most recent hike in PMS prices to between N168-170 per litre in November marks the fourth increase in PMS prices since June, and higher projections for crude prices suggest that pressures on this front may subsist in the near term. Already, higher energy costs and legacy issues appear to be counteracting the price-moderating impact of the harvest season, leaving legroom for sustained inflationary pressure in the last months of the year. All in, we expect inflation to print at 14.70% in November 2020 and retain our average inflation forecast of 13.2% for 2020.

 

MPC decision may be unaffected by inflation trajectory

The Central Bank of Nigeria cut its key interest rate by 100 basis points in September even though inflation was well above the 9.00% ceiling of its target range, positing that inflationary pressures were supply-side driven. In line with this position, the apex bank is unlikely to tamper with its policy lever due to inflationary pressures given that the drivers of price pressures are mostly the same. The apex bank, under the current CBN Governor, is yet to alter the monetary policy rate in consecutive meetings and is unlikely to break from trend due to the surge in consumer prices.


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