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NIGERIA INFLATION: Cost-push pressures stoke prices all-year.

Inflation soared to a 37-month high of 15.75% (Vetiva:15.91%) in December, driven more recently by festive demand alongside earlier multiple cost-push factors which stoked prices all through 2020-border closure, supply chain disruptions, FX and energy reforms. These translated to an average inflation outcome of 13.25% (Vetiva: 13.22%) for the year, reflective of the business climate hostilities that characterized the year on account of the pandemic.

Structural factors raise inflationary pressures on non-edible segment
Core inflation rose by 32bps to a 34-month high of 11.37% y/y (Nov’20: 11.05% y/y) no thanks to pre-existing pressures. Given the 31.5% y/y depreciation in the parallel exchange rate and 10.3% y/y higher fuel prices, all sub-divisions of the core segment experienced inflationary pressures. Reflecting higher energy costs, the Housing, Water, Electricity, Gas and other fuels (HWGS) inflation spiked to a 39-month high of 9.08% (Nov’20: 8.72%). Meanwhile, other segments continued to reel from multiple inflations levers. Health and transport inflation lead other core segments, rising to multi-year highs of 14.06% and 11.76% respectively.

FX and energy pressures to steer inflation further
As we progress into the new year, we expect reform implementation to continually take a toll on consumer prices. Pre-existing headwinds and base effect will drive inflation further to 16.73% y/y in the current month, despite the reopening of the borders and suspension of electricity tariff review. In 2021, erosion of purchasing power is imminent given implementation of reforms in the energy sector. In addition, continuous divergence of the parallel market rate from the official peg alongside persistent current account deficit raises fears of further FX-related inflationary pressures. Thus, we expect inflation for the year to average 18.91% (2020: 13.25%).