Core inflation gathers momentum amid supply disruptions (Source: InfoWARE, Date: 22-May-2020)

Core inflation gathers momentum amid supply disruptions 


Headline Inflation climbs to 12.34% YoY

According to the National Bureau of Statistic (NBS), headline inflation rose for the 9th consecutive month to 12.34% YoY (1.02% MoM) in April 2020. The current reading was largely in line with our 12.31% forecast and ahead of Blomberg consensus estimate by 12.27%. The rise in headline inflation mirrored pressures on both core (+25bps to 9.98% YoY) and food (+5bps to 15.03% YoY) inflation sub-indices.


Core inflation gathering momentum

While food inflation remained a primary driver of inflation in April[1], core inflation has noticeably soared in recent months, rising by 55 bps in the last two months and 63 bps since January 2020. For context, the core inflation increase over March and April equates the cumulative traction in the inflation sub-index witnessed over the preceding six months. Interestingly, the acceleration of core inflation also coincided with domestic lockdown responses to coronavirus spread, downward repricing of the naira, and a 2.5 ppts increase in VAT rate to 7.5% in February. Clearly, disruptions to supply chains and naira weakness are beginning to tell on local prices as evinced by the increases in all key core inflation sub-indices save for the Housing, Water, Electricity, Gas and Other Fuel (HWEGF) sub index, which marginally moderated on softer PMS pump prices.

[1] We believe recent food inflationary pressures reflected lean season shortages, sustained border closures, and panic buying


Figure 1: YoY movement in inflation rate since February (bps)



Source: NBS, CardinalStone Research 


To our minds, the greatest upside risk to inflation this year remains the implementation of cost reflective electricity tariffs that could see costs rise by up to 50% in some instances. Drawing from insights in 2016, when tariffs were increased by 40-45% in February 2016, we expect the inflationary impact of this policy to be immediate and widespread across both food and core components of the Consumer Price Index. However, our base case assumption given the ravaging effect of the pandemic domestically is that the tariff hike which was postponed till July 2020 may likely be deferred to further cushion the fallout from COVID-19 outbreak and as such we may only see its inflationary impact in the latter part of H2'20.


Save for the implementation of cost reflective tariffs, we expect sustained upward pressure on inflation on prolonged disruptions to supply chains and a further weakening of the currency at the I&E window closer to our FVE of N440/$ by year end. All in we forecast an average inflation to average 12.8% by year end and 12.4% for May 2020.


Michael Nwakalor (Macro Analyst)


Philip Anegbe (Team Lead)

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