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August 2022 Inflation review - Underlying shock keeps inflation on the run

In August, headline inflation moderated slightly on a month-on-month basis to 1.77% m/m (Jul’22: 1.82% m/m). We attribute this decline to fewer incidences of fuel scarcity and improved electricity supply. We observed a moderation in energy inflation on a year-on-year basis for the first time (Aug’22: 21.11% y/y vis-à-vis Jul’22: 25.55% y/y) since the Russian invasion of Ukraine (Feb’22: 2.92% y/y). While the descent was not strong enough to pull other indexes downwards on a year-on-year basis, we observed a broad-based decline in the month-on-month indexes (excluding transport), implying a possible slowdown in inflationary pressures should no additional shock occur. Despite the descent in m/m inflation, headline inflation nudged 88bps higher on a year-on-year basis to 20.52% y/y (Vetiva: 20.60% y/y), as the underlying shock from higher energy prices mounted pressure on the headline index.

 

Harvest and energy gains moderate pressures on the food basket

Food inflation moderated on a month-on-month basis to 1.98% m/m in August (Jul’22: 2.04% y/y), a five-month low. According to the National Bureau of Statistics (NBS), the harvest season and relative stability in transportation cost were responsible for the decline in month-on-month food inflation. The specific commodities which yielded the decline include tubers, garri, local rice, and vegetables.

On a year-on-year basis, food inflation nudged 110bps higher to 23.12% y/y (Jul'22: 22.02% y/y). With the price of wheat skyrocketing due to the Russia-Ukraine war, bread and cereals were the top triggers of food inflation on a year-on-year basis.

 

Core inflation tilts upwards

Prices in the core segment, which excludes volatile agricultural produce, rose at a faster rate in August. Core inflation increased 94bps y/y to 17.20% y/y (Jul'22: 16.26% y/y). The greatest pressures were felt on gas, liquid fuel, and transportation prices. On a month-on-month basis, core inflation slowed to 1.59% m/m, owing to stable energy and electricity supply.

 

Outlook: Inflation to ascend despite near-term reliefs

On a month-on-month basis, we may see headline and food inflation take a downturn due to the harvest season and stable energy prices. Similarly, lower currency volatility could contain core inflation in the current month.

 

On a year-on-year basis, we expect headline inflation to rise to 20.84% y/y in September. This outlook is hinged on the sustained passthrough of earlier energy shocks to commodity prices. For the broader year, we raise our average inflation estimate to 18.83% (2021: 16.98%).