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December 2021 Inflation: Inflation rises for the first time in 9 months

The National Bureau of Statistics (NBS) has confirmed that inflation nudged higher in the month of December. We note that the surge in month-on-month inflation to 1.82% m/m is the largest month-on-month print since May 2017.  Thus, headline inflation rose to 15.63% y/y in December, 23bps above November’s print (15.40% y/y) and 74bps above Bloomberg consensus estimate of 14.87% (Vetiva: 14.79%).

Energy inflation rose to a 4-year peak

In December, we observed that the Housing, Water, Gas, and other fuels (HWGS) segment recorded its highest y/y inflation reading in 55 months (Dec’21: 11.07% y/y). This fed into core inflation, which rose to a new 4-year high of 13.87% y/y. On a m/m basis however, core inflation decelerated to 1.12% m/m. We believe rising cooking gas prices (y/y) and relatively stable exchange rates (m/m) were responsible for the mixed outcome.

 Food insecurity could be a risk to watch out for

Food inflation surprised to the upside, rising to 17.37% y/y in December. Again, we find instructive that food inflation recorded its highest m/m pressure over the same time frame (as headline inflation) with a 2.19% m/m print, as opposed to the 2021 average of 1.22% m/m. In unpacking the reasons for the deviation in trend, we observed that 19 states recorded higher food inflation numbers in December, which is significantly higher than 4 states, in the previous month. This could be due to insecurity in food-producing states.

Reforms and agricultural headwinds could extend inflationary pressures

Going into 2022, we acknowledge four key risks that could upend consumer prices over the course of the year. First, we note that adverse weather conditions and insecurity in food-producing states could trigger higher food prices. According to the Famine Early Warning Systems Network (FEWSNET), high levels of conflict and displacement of individuals could cause off-season farming activities (in December) to be significantly below average, leading to constrained food access through May 2022.

Secondly, we see the decision to remove subsidies as another key trigger given the expensive trade-offs in the fiscal space. However, we believe the political atmosphere could surmount this risk. In addition, the approval of a power tariff hike in the current year could induce higher core inflation.

Finally, the proposed taxes on soft drinks could add to existing pressure on the non-alcoholic food basket. Against this backdrop, we estimate that food inflation could slow to 17.28% y/y in January. We also expect a slight slowdown in headline inflation to 15.60% y/y in January. However, we do not rule out the possibility of an uptick in inflation due to pressures on the food segment.

 

While the uptrend in inflation reinforces negative real rates of return, we do not see scope for a change in interest rates by the apex bank at the first MPC meeting of the year. Given the apex bank’s earlier stance that inflation is structurally driven and that the absence of significant portfolio inflows could make Nigeria less exposed to the normalization of monetary policy in advanced economies, interest rates are likely to be remain unchanged.