Inflationary Pressures Not Abating Just Yet


Monday, June 21, 2021 / 10:08 AM / by FBNQuest Research / Header Image Credit: NBS


Following our initial take on the May inflation figures, we delve further into some of the drivers in today's daily. Although the May inflation rate moderated due to a softening in food inflation to 22.28% y/y in May from 22.72% in the previous month, the headline rate remains well above the CBN's single-digit target, eroding consumers' purchasing power.


Food inflation remains the primary driver of the high headline rate recorded. It has been on the rise since the closure of the country's land borders in August '19. Although we saw a slight slowdown in April and May, food inflation is still significantly higher than pre-pandemic levels. The Central Bank of Nigeria (CBN) partly attributes the softening to its interventions in various sectors of the economy to stimulate aggregate demand and boost production, particularly for Small and Medium Scale Enterprises (SMEs).


The National Bureau of Statistics' (NBS) selected food price watch report for May recorded y/y increases in the prices of all 42 food items surveyed. The increase in the cost of food is due to low food production and supply bottlenecks, resulting from persisting security crisis, especially in major food producing regions of the country.


On the other hand, the price of imported food (which accounts for 13.2% of the basket) has been relatively stable, rising m/m between 1.20% and 1.34% since January '19. This is despite exchange rate adjustments and challenges in accessing fx, supported by anecdotes suggesting that importers have been forced to tap the parallel market for their needs. Our explanation is that importers are reluctant to pass on the increase in their own costs.


The latest NBS inflation report reveals that the transport segment, which accounts for 6.5% of the basket, posted price increases of 1.1% m/m and 14.94% y/y in May, compared with 1.1% m/m and 14.87% y/y recorded in April.


The transport segment is directly impacted by the price of Premium Motor Spirit (PMS, or gasoline) and fx because most vehicles and many vehicle spare parts are imported. As we have often said, we do not see any dramatic change in the exchange-rate regime in the short term. However, as oil prices rise, the argument gets stronger that fuel subsidies should be phased out completely. This would result in an increase in the price of PMS and, as a result, a rise in transportation prices.


The price increases recorded in the health segment were 1.1% m/m and 15.8% y/y in May. Pharmaceuticals and medical services have repeatedly featured as leading drivers of core inflation.


In May, increases of 0.9% m/m and 11.4% y/y were recorded for the education segment within the inflation basket. The incessant rise in the cost of items that make up this segment (books and stationery) mirrors the steady increase in exchange rate over the months as the raw material used in the production of these items are imported.


Inflationary pressures are expected to persist over the next six months. In its recent development update on Nigeria titled "Resilience through Reforms", the World Bank expects inflation to remain above 16% y/y at end-2021 (our expectation is 16.5% y/y). The Bank opines that even if domestic food production increases and supply and distribution constraints are eased, a combination of exchange-rate management challenges, fx shortages, border closures, expansionary monetary policy and the monetary funding of the fiscal deficit will continue to generate inflation pressures.

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