October 20, 2021/United Capital Research
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Last week, the National Bureau of Statistics (NBS) released the Consumer Price Index (CPI) report for Sep-2021. According to the report, the headline inflation rate eased to 16.63% y/y, printing lower than our forecast of 16.69%, and 38bps lower than Aug-2021 inflation (17.01%), implying that the rate of change in prices continued to subside in Sep-2021. On a m/m basis, the broad CPI increased by 1.15%, faster than the 1.02% m/m increase in Aug-2021. The faster month-on-month increase in the inflation basket was largely due to FX pressures caused by the scarcity of FX in the parallel market, given the backdrop of the CBN’s ban of FX sales to BDCs. Nevertheless, the high base impact continues to moderate the impact of inflationary pressures, driving y/y inflation rate lower.
On a segmented basis, food inflation printed at 19.57% y/y in Sep-2021 compared to 20.30% in Aug-2021, a 73bps decline. On a m/m basis, the Food sub-index increased by 1.26% in Sep-2021, up 20bps from 1.06% in Aug-2021. We note that the commencement of the harvest season in September has started to reduce pressure on prices of some staple foods. However, food items with FX-linked pressures remain on the rise as FX concerns linger. In addition, we note that the unabating security challenges continues to hamper harvest quantities as farming activities during the planting season were broadly curtailed. Unsurprisingly, food inflation climbed m/m by 20bps to 1.26% y/y.
Core inflation sub-index was up by 33bps y/y to 13.74% in Sept-2021 whilst m/m also increased by 47bps in Sep-2021 to 1.24% in the period under review. The highest increases were recorded in prices of gas, household textile, garments, motor car, game of chance, major household appliances whether electric or not, passenger transport by air, hospital services, other services in respect personal transport equipment, wine, clothing materials, other articles of clothing and clothing accessories, non-durable household goods.
Inflation Outlook: High base effect to sustain disinflation
Looking ahead, while price pressures still abound in the economy, our prognosis remains that disinflation will persist in the immediate term. First, for food inflation, we expect some reduced pressure on locally produced food items in the near-term as the supply chain continues to be debottlenecked while the harvest season gets into full swing for the rest of year. Nevertheless, we expect harvest quantities to be limited (due to reduced farming activities during the recent planting season), implying there could be worse food price pressures to come during the 2022 planting season.
On core inflation, we expect to see a mixed bag of FX impact as the recent FX pressures in the parallel would remain a concern for imported commodities that have been banned from accessing FX from the official channels. On the flipside, we expect FX liquidity via official channels to improve, providing succour for importers of items regarded as legitimate by the CBN. In addition, we do not expect the risks of higher energy cost to crystallise in the near term as FG continues to maintain subsidies on petrol and electricity tariffs.
Also, we note the high base effect on inflation is expected to become more pronounced in the final quarter of the year, adequate to absorb any pressure that could result from FX scarcity. For Oct-2021, we forecast m/m headline inflation will print at 1.20%, 5bps higher than September’s 1.15% while annual headline inflation will drift lower by 39bps to 16.25%.
Given we expect sustained disinflation, we believe this further dent the case for tighter monetary policy in subsequent MPC meetings. This reduces upside risk for the yield environment, although we note huge funding pressures for the Federal Government (FG) may keep the yield environment moderately biased upwards.
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