January 17, 2022/Cordros Report
The December 2021 inflation report recently released by the National Bureau of Statistics (NBS) showed that the headline inflation snapped eight consecutive months of deceleration, increasing by 23bps to 15.63% y/y. The preceding was due to a negative surprise from the food basket amid the sustained impact of (1) below-average harvest season, (2) persistent securities challenges, and (3) disruption to trade flows. The outturn was 83bps higher than Cordros’ estimate and Bloomberg’s median consensus estimate (14.80% y/y). On a month-on-month basis, the headline inflation printed 1.82% (November: 1.08% m/m) – the highest since May 2017 (1.88% m/m).
Food prices rose by 2.19% m/m (November: 1.07% m/m) – significantly above the 2021 monthly average (1.34% m/m) and the highest since May 2017 (2.54% m/m). In our opinion, the (1) festive-induced demand, (2) higher food distribution costs following more frequent disruptions, (3) currency pressures, and (4) an upsurge in security challenges in food-producing regions contributed to the increasing prices. Indeed, the Famine Early Warning Systems Network (FEWSNET) cited that the harvest season, which filtered into December in the Northern region, was below average, particularly on account of the lingering banditry attacks and consequent farmers’ displacement in the North East. Thus, the prices for farm produce – both staple and cash crops have remained significantly above the five-year average and last year. Sequentially, Farm produce (2.38% m/m vs November: 0.93% m/m) and Processed food (2.14% m/m vs November: 1.11% m/m) prices rose to a 56-month high while the imported food sub-basket rose slightly by 1bp to 1.37% m/m.
Elsewhere, the core basket (-14bps to 1.12% m/m) reversed the previous month’s uptrend despite (1) higher utility prices, (2) festive-induced spending, and (3) persistent FX supply challenges in the parallel market. The breakdown provided showed price increase across the non-food sub-baskets with the most pressure coming from the HWEGF (+33bps to 1.30% m/m), Clothing and Footwear (+24bps to 1.40% m/m), Recreation & Culture (+19bps to 1.29% m/m), and Health (+8bps to 1.21% m/m) sub-baskets. Compared to last year’s corresponding period, the core inflation increased slightly by 2bps to 13.87% y/y (November: 13.85% y/y).
Overall, we now look for a m/m headline inflation of 1.36% in January, with the high base effect from the prior year translating to a y/y reading of 15.47%.