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July 2022 Inflation review - Inflation rises to a 17-year high

Inflation rises to a 17-year high

Inflation rose for the sixth consecutive month, printing at 19.64% y/y (Vetiva: 19.70% y/y). This surge was driven by high energy prices and reinforced by low base effects. For context, marketers raised the prices of PMS to ₦170 - ₦180 per litre after a brief incidence of fuel scarcity in the month of July. As a result, headline inflation remained flat on a month-on-month basis (Jul’22: 1.82% m/m). Surprisingly, this moderation was also observed in the imported food segment (Jul’22: 1.39% m/m; 3 bps lower m/m) despite the free fall of the Naira in the unofficial market. On a year-on-year basis, imported food inflation rose by 17.91% in July (Jun’22: 17.84% y/y).

 

Structural triggers raise food inflation

Food inflation surged to 22.02% y/y (Jun’22: 21.64% y/y), driven by price increases in farm produce (+42.76% y/y) and processed food (+19.33% y/y). Looking at farm-produce prices, insecurity continues to remain a cog in the wheel of food production, despite the expected reprieve from the harvest season. Processed food inflation remained above 2% m/m, a level attained after fuel scarcity erupted in February. On a month-on-month basis, however, food inflation moderated to 2.04% m/m (Jul’22: 2.05% m/m).

 

Core inflation ticks higher on energy pressures

Core inflation rose by 51bps to 16.26% y/y (Jun’22: 15.75% y/y). We saw the highest pressures on the prices of liquid and solid fuels, gas, transport (road and air), cleaning, and clothing.

 

Outlook: Sustained energy and FX shocks could raise inflation higher

We note that energy shocks are still prevalent in the economy, with incidences of fuel scarcity resurfacing in Abuja. This could add to pressures on headline inflation in the ongoing month, despite the onset of the harvest season. As a result, we expect headline inflation to rise to 20.63% y/y in August.

 

Amid the heightened volatility in the FX market, we see room for increased passthrough to both food and core inflation. The descent in the Naira could spiral into higher inflation in the coming months. With these risks in view, we expect food inflation to ascend to 23.3% y/y in August.