September 2020 CPI: No Respite in Sight for Food Prices

October 15, 2020/Cordros Report

In our August inflation report, see report: A Continued Increase in Inflationary Pressure, we had posited that the impact of climate change, increase in the price of PMS, and hike in electricity tariff would keep domestic prices elevated in September. True to our prognosis, data from the National Bureau of Statistics (NBS) showed that headline inflation increased by 49bps to 13.71% y/y – the highest reading in 32 months. On a month-on-month basis, headline inflation increased by 14bps to 1.48% – tracking significantly above the 2020 average of 1.11%. The outturn is 20bps higher than Cordros’ estimate (13.51% y/y), with the deviation largely seen from the food basket, and 41 bps higher than Bloomberg median consensus estimate (13.30% y/y).

Food inflation rose 66bps to 16.66% y/y during the review period, on the back of an increase in prices of farm produce (+86bps to 16.49% y/y), processed food (+6bps to 16.71% y/y), and imported food (+2bps to 16.44% y/y). In our view, food price pressures stemmed from a perfect storm of (1) rising flood cases in the food-producing regions, (2) PMS induced rise in transport costs (3) currency weakness in the parallel market, and (4) lingering effects of the continued border closure. FEWSNET also reported that prices of staple foods including maize, rice, millet, sorghum, and yams are above last years and the five-year average.

Extending its uptrend from last month, core inflation continued its acceleration in September, advancing by 6bps to 10.58% y/y. Compared to a month ago core inflation rose 0.94%, suggesting that the 6.76% m/m increase in the retail price of PMS might have a lagging impact on the overall core basket. We, however, note pressure in the clothing & footwear (+6bps), transport (+5bps), and HWEGF (+3bps) inflation – all of which account for c. 60% of the core basket, which shows that the impact of currency depreciation has not completely waned.

For October, we expect the pressure on consumer prices to be maintained, and look for m/m headline inflation reading of 1.51% in October, with the low base effect from 2019 translating to 50bps expansion in y/y headline inflation to 14.21%.

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