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November 2021 Inflation review - Base effects override festive pressures

Base effects override festive pressures

According to the National Bureau of Statistics, inflation trended downwards for the eighth consecutive month in November. Falling to 15.40% y/y (Vetiva: 15.24% y/y), headline inflation continues to benefit from the decision to retain fuel subsidies and the harvest season. On a month-on-month basis, however, inflation rose at a faster pace (Nov’21: 1.08% m/m), amid the frontloading of household items ahead of the festive season.

Food inflation decelerates despite frontloading

Over the past four months, food inflation fell faster than headline inflation as base effects pulled food inflation downwards. In November, food inflation fell to 17.21% y/y, 21bps above our forecast (Vetiva: 17.00% y/y). On a month-on-month basis, food inflation rose at a faster pace (Nov’21: 1.07% m/m, Oct’21: 0.98% m/m), substantiating our views on demand frontload ahead of the festive season. While food inflation fell to a 14-month low in Nigeria, global food inflation rose to an all-time high in November as climate change held supply bound amid teeming import demand. While domestic intervention efforts alleviate the impact of global headwinds in Nigeria, insecurity continues to throw a spanner in the works of the apex bank.

Core inflation maintains zig-zag movement

In November, core inflation rose to a 4-year high of 13.85% y/y. For the past seven months, core inflation has remained stuck within the 13% region, oscillating between 13.0% and 13.7%. We attribute this to the resuscitation of the trade sector, which has improved supply, amid a weakening Naira, which has dragged purchasing power. However, the relative stability in the parallel market since July has provided some respite for core prices.

Proposed reforms pose upside risks in the coming year

In the ongoing month, we see festive pressures contributing to a build-up in inflation on a month-on-month basis. However, we believe it is insufficient to lift headline inflation beyond current levels. Thus, we see headline inflation falling further to 14.79% y/y in Dec’21. That said, we retain our average headline inflation forecast of 16.91% y/y for 2021 (2020: 13.21% y/y).

 Food inflation could fall towards 16.05% y/y in December, despite increased demand from year-end festivities. We expect the harvest season to continually provide support in the near term, barring any significant shock that could aggravate food prices. Thus, we expect food inflation to average 20.40% in 2021 (2020: 16.11% y/y).

 Core inflation, on the other hand, could keep oscillating as the reintroduction of taxes on Liquified Petroleum Gas prices contributes to pressures on the Household, Water, Electricity, Gas and other fuels (HWGS) segment. Thus, we expect core inflation to print 13.51% in Dec’21, leading to an average of 13.11% y/y in 2021 (2020: 10.29% y/y).

 Going into 2022, we find instructive that Federal Government has been receptive to the recommendations of the World Bank, including the removal of subsidies, provision of relief for the poor, and the imposition of taxes on both non-alcoholic and alcoholic drinks. Thus, a deteriorating fiscal position tilts pricing risks to the upside, as sustained downturn in the oil sector could result in the implementation of austerity measures. While we believe social resistance could prevent absolute removal of fuel subsidy, current communication suggests Nigerians could brace up for possible increments in fuel prices and indirect taxes. In our view, social dissent could keep pump prices unchanged as electioneering dominates the scene in 2022. Thus, we see inflation sitting within the bands of 12.5% y/y - 14.0% y/y in the coming year.