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January 2023 Inflation review - Fuel scarcity, cash crunch lift inflation to 17-year high

Fuel scarcity, cash crunch lift inflation to 17-year high

Headline inflation rose faster than expected in January, reaching 21.82% y/y (Dec'22: 21.34% y/y). The increase was 52bps higher than the Bloomberg consensus estimate of 21.30% y/y (Vetiva: 21.38% y/y). This uptick was mainly driven by the current cash crunch and the continued scarcity of Premium Motor Spirit (PMS).

Over the course of the month, there was a broad-based uptick in month-on-month inflation. Headline inflation ticked up to 1.87% m/m, 16 basis points higher than the previous month (1.71% m/m), driven by higher food and fuel prices. The largest pressures were observed in energy (+2.62% m/m); food (+2.08% m/m); transport (+1.99% m/m); and the housing, water, gas, and other fuels segments (+1.55% m/m). This highlights supply chain pressures from higher fuel costs, FX pressures, and the cash crunch.

Processed food drove food inflation higher

In January, food inflation reached a 7-month high of 2.08% m/m (Dec'22: 1.89% m/m). Despite lower farm produce price inflation, Nigeria recorded higher processed food inflation (+2.08% m/m). This can be linked to increased logistics costs amid moderate exchange rate pressures. Overall, food inflation rose 56bps higher to 24.32% y/y (Dec'22: 23.75% y/y), due to higher fuel prices and currency volatility.

Core inflation maintains its ascent

Core inflation increased to 19.16% y/y (Dec'22: 18.49% y/y), owing primarily to persistent energy pressures. Similarly, continued fuel scarcity and higher parallel market exchange rates drove the core index higher to 1.82% m/m (December'22: 1.33% m/m).

Cash crunch could fuel inflation

The Naira crash crunch has heightened price distortions within the economy, in addition to the lingering incidences of fuel scarcity. While the extended deadline for the cash-swap has elapsed, consumer prices could be rattled by currency racketeering amid the scarcity of new Naira notes. As a result, we anticipate that this, alongside the lingering energy scarcity, could lift inflation to 22.16% y/y in February. Beyond February, we still factor in the fuel subsidy removal planned for April – June 2023. With this in mind, we raise our full-year headline inflation estimate for 2023 to 22.35% y/y (2022: 18.76% y/y).