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Headline inflation reverts to trend

In line with our estimates, headline inflation fell slightly to 15.60% y/y (Vetiva: 15.60%) in January. As we posited in our December 2021 inflation report, there were no strong reasons for headline inflation to trend higher in January. We also note that the decision to retain subsidies for 18 months doused inflationary expectations. Most importantly, the fading festive demand also fuelled a lower m/m print of 1.47% (Dec'21: 1.82%) in January.

Food inflation cools as festive demand subsides

Food inflation fell by 24bps to 17.13% y/y in January (Dec’21: 17.37% y/y). The decline in food inflation was anticipated, especially due to the decline in demand following the festive season. On a monthly basis, food inflation fell to 1.62% m/m, 57bps lower than the record level of 2.19% m/m seen in December. In January however, the rise in the food index was caused by increases in the price of staple items such as Bread, Tubers, Soft drinks, Fat & Oil, and fruits. Higher soft drink prices could be as a result of the excise duties on non-alcoholic drinks, which was easily passed on to final consumers.

Core inflation stays flat

Moving on to the core segment, we note that core inflation remained unchanged at 13.87% (Dec’21: 13.87%). However, m/m core inflation surged to 1.25%, 13bps higher than December’s figure of 1.12%. The highest pressures on the core segment were recorded in the prices of Electricity, Liquid fuel, cleaning, and clothing.

Fuel scarcity could slow down the pace of disinflation

An obvious risk, which has surfaced in recent times, is the higher cost of Premium Motor Spirit (PMS) occasioned by the importation of sub-standard PMS. Reports show the inelastic commodity is selling at significant premiums above the recommended pump price of ₦165/litre as the Nigerian National Petroleum Corporation (NNPC) moves to clean up the PMS saga. While this event is inflationary, we premise our estimate on timely intervention by the NNPC. While we believe this could lead to a higher m/m outturn in February, we expect the event to slow down the pace of deceleration in headline inflation to 15.44% y/y. Should the fuel scarcity persist throughout February, headline inflation could remain at a bear case scenario of 15.60% y/y.