December 2020 CPI: Headline Inflation to Maintain Uptrend over the Medium Term.

January 15, 2021/Cordros Report

In our November inflation note, we stated that domestic prices would continue to rise on the back of the festive induced demand and sustained impact of the poor harvest season. True to our prognosis, headline inflation rose 15.75% y/y in December (November: 14.89% y/y) – the highest level since November 2017. This puts the 2020FY average inflation rate at 13.21% (2019FY average: 11.39%). The outturn was broadly in line with our estimate of 15.74% y/y and 25bps higher than Bloomberg median consensus estimate (15.50% y/y). On a month-on-month basis, headline inflation increased slightly by 1bp to 1.61%, significantly higher than the 2020 average of 1.23%.

Unsurprisingly, food prices sustained their upward trajectory, as food inflation accelerated by 126bps to 19.56% y/y, the highest level in 38 months. In addition to the low-base effect, we attribute this to (1) the sustained impact of the poor harvest season, (2) festive induced demand which further widened the supply gap, (3) high food distribution costs, and (4) lingering security challenges in food-producing regions. Indeed, Famine Early Warning Systems Network (FEWSNET) also observed increased conflict in early December which caused further displacement in the North-East, particularly in Borno State. The conflict limited access to farms, thereby reducing the already expected sub-optimal harvest. Accordingly, prices of maize, millet, rice, and sorghum remained above last year and the five-year average across the country.

After the surprising moderation in the prior month, core inflation resumed its ascent, advancing by 32bps to 11.37% y/y. Sifting through the breakdown provided, the increase in the core basket emanated from price pressures across all the components of the core index. The most pressure was felt in health (+51bps), transportation (+48bps), and HWEGF (+35bps) inflation – all of which account for 51.2% of the core basket. We attribute this to the continued impact of the soft hike in electricity tariffs as well as the lagging impact of the 5.7% m/m increase in PMS price in November. Notably, health and transport prices have been increasing consistently since March. On a month-on-month basis, core inflation increased by 39bps to 1.10% m/m – above its 2020 average of 0.90% m/m.

We expect the uptrend to continue over the medium term, albeit at a softer pace. Accordingly, we forecast headline inflation of 16.10% y/y in January 2021.

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