July 2021 CPI Report: Further Deceleration in Inflation


Wednesday, August 18, 2021 / 10:15 AM / by FBNQuest Research/ Header Image Credit: FBNQuest Research


The headline rate maintained its downward trend for the fourth successive month to 17.38% y/y from 17.75% in June. Our expectation, shared with the newswires, was a slightly higher rate of 17.50%. Base effects have turned favourable and should remain so until end-year, most of all in Q4. At the last monetary policy committee (MPC) meeting in July, the committee noted with satisfaction the recent deceleration in inflation, while output growth had remained positive. The MPC unanimously retained all parameters because in its view, the current situation, does not allow for either tightening, which would limit output growth, or relaxation, which would intensify inflationary pressures.


Food price inflation retreated to a six-month low of 21.03% y/y from 21.83%, according to the NBS report. The biggest contributors to food price inflation last month were price increases in meat, coffee, tea and cocoa, bread, cereals, milk, cheese, eggs, soft drink, and vegetables.


Core (non-food) prices rose from 13.09% y/y to 13.72%. The highest increases were recorded in pharmaceutical products, hospital services, garments, furniture and furnishing, cleaning services, among others.


On a y/y basis, imported food price inflation rose to 17.07% y/y from 17.03% y/y recorded in the previous month. Unlike other sub-indices represented in our chart below, imported food price inflation has not recorded any decline since August '19. This reflects importers' persistent difficulty in securing fx, leaving them with no choice than to access the parallel market for their needs. At the last MPC meeting, the CBN governor unexpectedly announced the cessation of forex sales to Bureau de change (BDC) operators. The short-term effect of this announcement was a weakening of the naira in the parallel market to a record low of NGN525/USD. The Naira has since appreciated to NGN513-515 levels.


The NBS also tracks headline inflation by state. The highest headline rate in July was 22.49% y/y in Kogi and the lowest, 14.53%, in Kwara. Kogi held the same ranking in June. It is worth noting that household baskets vary across states due to different consumption patterns.


At its July meeting, the MPC expressed optimism that, although headline inflation remained well above the ceiling of the CBN's 6-9% corridor, current interventions by the Bank in various sectors of the economy will further depress inflationary pressure as output growth improves and the negative output gap closes. The committee's next meeting is scheduled to hold on the 20th and 21st of September.


Due to low-base effects, our call is for further reduction in the headline rate in August to 16.98% y/y.

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