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Nigeria August 2020 Inflation Review - August Inflation maintains upward movement, hits 13.22% in August

In August, inflation edged up by 40bps to 13.22% y/y, 17bps above our estimate (Vetiva: 13.05% y/y) due to the same pressure points - higher fuel prices and upward pressure on the exchange rate in the parallel market. In August, the Petroleum Products Marketing Company (PPMC) fixed the ex-depot price of PMS at ₦138.62 per litre translating into a retail price band of ₦148 - ₦150, higher than July’s band (₦140.80 - ₦143.80). This continued to upset prices as food and transport costs remained elevated given that m/m headline inflation is at its 6-month high of 1.34% (Jul 20: 1.25%). Thus, food inflation inched up by 12bps to a 29-month high of 16.00% y/y (v/s 15.48% y/y in July), while core-inflation rose 42bps higher to a 27-month high of 10.52% y/y (vs 10.10% y/y in July). In August, inflation edged up by 40bps to 13.22% y/y, 17bps above our estimate (Vetiva: 13.05% y/y) due to the same pressure points - higher fuel prices and upward pressure on the exchange rate in the parallel market. In August, the Petroleum Products Marketing Company (PPMC) fixed the ex-depot price of PMS at ₦138.62 per litre translating into a retail price band of ₦148 - ₦150, higher than July’s band (₦140.80 - ₦143.80). This continued to upset prices as food and transport costs remained elevated given that m/m headline inflation is at its 6-month high of 1.34% (Jul 20: 1.25%). Thus, food inflation inched up by 12bps to a 29-month high of 16.00% y/y (v/s 15.48% y/y in July), while core-inflation rose 42bps higher to a 27-month high of 10.52% y/y (vs 10.10% y/y in July).

Energy reforms pass through food prices

Food inflation rose to 16.0% y/y in August. This was underscored by continuous pressures in both the non-alcoholic (+51bps) and alcoholic (+19bps) segments to 15.91% and 10.40% respectively.

On a monthly basis, food inflation (1.67% m/m) rose to a 38-month peak. The non-alcoholic pack (+1.66% m/m) rose by 15bps while alcoholic segment (+0.92% m/m) grew by 2bps. A cursory glance at selected food price watch data showed that 95% and 83% of the listed items were sold at higher prices in June and July respectively, lending credence to heightened inflationary pressures from higher fuel prices. Imported food inflation rose marginally to 1.31% m/m from 1.30% m/m in July, as forex restriction policies and limited domestic supply persist.

Energy reforms to further quicken inflation

We expect headline inflation to rise by 13.67% y/y in September due to the new pressures from the full deregulation of the downstream sector and upward review of electricity tariffs. While exchange rate pressures persist, the implementation of these energy reforms would aggravate prices in September more than the border closure policy did a year ago. The removal of fuel price bands could initiate market forces to drive fuel prices up. However, the absence of product differentiation and presence of many players could result in soft price reductions as competition kicks in. We expect wider price differentials across geographical divides due to difference in distribution costs. This could hasten inflation in the Northern part of the country, further worsening living conditions, given the high levels of poverty in the region. Thus, we raise our average FY’20 inflation forecast to 13.10% (2019: 11.39% y/y).