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Tuesday, February 18, 2020 /01:58
PM / By CardinalStone Research / Header Image Credit: Premium Times, Akin Oyewobi
Headline Inflation accelerates to 12.13% YoY
According to the National Bureau of Statistics (NBS), Nigeria's headline
inflation accelerated to 12.13% YoY (0.87% MoM) in January 2020, largely in
line with Bloomberg consensus of 12.12% YoY. The current reading is also 15bps
ahead of the December 2019 reading, with pressures stemming from the food
inflation sub-index (+18bps to 14.85% YoY). The pressure on the food basket was
linked to price pressures from bread & cereals, meat, oil & fats,
potatoes, yam & other tubers, and fish. While we retain our view on the
impact of stricter border enforcements on food prices (partly due to
consumption re-allocations from imports to domestically produced alternatives),
increasing communal conflicts, banditry, and kidnapping in central and
northwestern Nigeria may have added further pressures on food prices in the
review month. Notably, pressures on cereal prices may have also reflected
weaker-than-expected yield from the recent main harvest on prolonged rainfalls
and flooding in some producing areas. In our view, inflation is likely to come
in at 12.29% YoY in February.
Electricity cost may stoke core inflationary pressures from April
onwards
We believe the key upside risk to headline inflation is rooted in core
inflation, even though food pressures have been in the spotlight since the
border restrictions were instituted in August 2019. To this point, we note that
the Nigerian Electricity Regulatory Commission (NERC) has advised power
distribution companies to gross up electricity tariff by 50.0% from April 2020
(as opposed to the 30.0% increase previously expected by the market). This
planned increase is said to be largely in line with efforts to meet tariff
shortfall funding target for 2020 by the Federal Government (FG). If
implemented, average electricity tariff is likely to increase to N40.95/kWh on
01 April 2020 from N27.30/kWh currently.
Source: NBS, CardinalStone Research
In order to distill the potential passthrough of the proposed increase
on core and headline inflation, we draw insights from similar electricity price
adjustments implemented in 2016. Precisely, following the 41.0% to 45.0% hike
in electricity prices in February 2016, MoM headline and core inflation surged
from 0.87% and 0.84% apiece in January 2016 to 2.30% and 2.72%, respectively,
in February 2016. Worthy of note, MoM inflation in NBS' electricity-heavy core
sub-component "Housing Water Electricity and Other Gas (HWEGOF)" came in at
6.7% MoM in February 2016 (compared to an average of 0.4% MoM in the preceding
five months). We believe that the hike in tariff contributed significantly to
these pressures given that the other key factor that would have had a hand in
the pressures (petrol scarcity) only commenced in the last week of February
2016. In our view, therefore, the planned electricity tariff adjustment,
which is of a similar scale to that of 2016, is likely to have a similar impact
on inflation between April 2020 and the beginning of main harvest in
September/October 2020.
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