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June 2022 Inflation review - Persisting fuel scarcity keeps inflation on the uptrend

Persisting fuel scarcity keeps inflation on the uptrend

Nigeria's headline inflation rate increased for the fifth time this year, reaching 18.60% y/y (Vetiva: 18.38% y/y), as fuel scarcity chokes consumer prices. Earlier measures to curb fuel scarcity, including a 25% increase in transport relief by the Federal Government, appear inadequate.

 

As explained by the middle-men (the independent marketers), we understand that the lingering incidence of fuel scarcity is driven by (i) a steady decline in PMS supply from the official sources; (ii) the purchase of the product from the alternative sources (private depots) at higher ex-depot prices; (iii) the surge in the price of diesel, which inflates the distribution cost of petroleum products; and (iv) the sticky price of PMS, which is below procurement cost. As a result of the above reasons, marketers estimate that the price of PMS must rise to a market-clearing price of ₦180/litre.

Food inflation rises on structural shocks

Food inflation increased 110bps to 20.60% y/y in June (May'22: 19.50% y/y). We attribute this uptick to elevated energy prices, which stokes the cost of transporting and preserving food. According to the recent NBS data and the most recent food price watch, the major food items driving food inflation are bread (+35% y/y), wheat (+34% y/y), yam (+37%), meat (+34% y/y) and palm oil (+43% y/y). We find instructive that the prices of farm products (37.44% y/y) are driving the food basket more aggressively than processed foods (18.44% y/y), underscoring the structural challenges plaguing the domestic food supply chain. On the other hand, core inflation, which excludes volatile farm produce items, has remained on the uptrend, rising to 15.75% y/y (May’22: 14.90% y/y)

Outlook: Looming fuel price hike could drive inflation further

Due to a potential increase in the price of PMS and the existence of fuel scarcity, we expect headline inflation to rise once again in July to 19.53% y/y. Food inflation, on the other hand, could rise to 21.8% y/y in July.  For the broader year, we expect headline inflation to average 18.0% y/y (2021: 16.98% y/y).

 

At the writing of this report, the Federal Government is meeting with the Major Oil Marketers Association of Nigeria (MOMAN) and the Independent Marketers Association of Nigeria (IPMAN) to discuss an imminent hike in PMS prices.

We believe a decision to increase PMS prices would raise inflation sharply on a month-on-month basis (>2%), and douse inflationary expectations in the outgoing months. Should the status quo of resurging incidences of fuel scarcity persist, inflation could be knocking on the door of 20% y/y.