February 20, 2020/InvestmentOne Report
· Earlier this week, the National Bureau of Statistics (NBS) released the inflation report for the month of January 2020 which showed an increase in the headline inflation rate, which was in line with our expectations. The report showed an acceleration in headline inflation from 11.98% in December 2019 to 12.13% y/y in January 2020.
· The Food sub index showed a 12.85%y/y increase, 18bps higher than the level in December 2019. Similarly, on a monthly basis, the index inched up by 0.99%, 2bps higher than the level in December 2019. We believe the rise in the food index may be due to increase in staple food prices, especially imported products.
· The rise in the food sub-index could be attributed to the border closure which could have led to an increase in the prices of staple foods such as rice, meat, bread, cereals, potatoes, yam, vegetables, fish and oils in the country.
· The Core Inflation for January 2020 stood at 9.35% y/y, 2bps higher than the level in December 2019. On a monthly basis, the movement in the core sub index was somewhat flat at 0.82%m/m in January 2020.
· Premium Motor Spirit (PMS) during the course of January 2020 as stipulated by NBS was somewhat flat as it was only down by 0.23%y/y to N145.37 per litre. We believe the stability in price may not be unconnected to the border closure, which has helped to reduce the smuggling of the product out of the country. We postulate that PMS prices may remain at the official price of N145 per litre in the near term.
· We see inflation maintaining its upward trajectory due a lot of factors presently in the economy. Although, it was reported that some retailers had effectively increased VAT on goods and services to 7.5%, we think the full impact of the new VAT will reflect in February when the new VAT became effective officially. Also, the implementation of the new minimum wage could have boosted consumer spending, we opine that the faster increase in CPI may be due to lower food supply relative to demand which may not be unconnected to the border closure that started August 2019
· In the same vein, we believe the potential increase in electricity tariff may add more pressure to consumer prices in the near term.
· As such, we think inflation numbers may continue to increase in the near term. With that being said, while the recent CBN’s increase of CRR to 27.5% from 22.5% was meant to reduce liquidity and curb inflation, we think the current inflationary trend was more of cost push inflation which should be tackled through increased productivity particularly food products. With a fast population growth rate of c.3% per annum, we believe more efforts have to be made to ensure that more people are not falling into extreme poverty as the nation’s food growth (agriculture sector growth at 2.38% as at 9months 2019) continues to lag behind the rate of population growth. Overall, we believe there is need to more fiscal policy and concerted efforts from all stakeholders to save the country from hunger in the near term.