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October 2022 Inflation review - Inflation could be close to peak

In the month of October, headline inflation accelerated to 21.09% y/y (Sep’22: 20.77% y/y) lower than consensus estimate of 21.3% y/y (Vetiva: 21.37% y/y). We attribute the deviation to the sustained passthrough of the ongoing harvest season as the impact of floods on inflation was muted.

Food inflation: Energy pressures tussle with harvest gains

The harvest season continued to provide respite for food inflation with food inflation falling to 1.23% m/m (Sep'22: 1.43% m/m). Due to the low base from the prior year, the underlying energy shock spurred food inflation to 23.72% y/y (Sep'22: 23.34% y/y).

Core inflation remains energy driven

In October, core inflation increased to 17.76% y/y (Sep'22: 17.60%), driven primarily by energy inflation (+32% y/y). The highest pricing pressures were felt in liquid and solid fuels, transportation, and vehicle spare parts. On a month-on-month basis, we observed a decline in core inflation to 0.93% m/m (Sept'22: 1.59% m/m). This could be due to relatively stable electricity supply in the prior month.

Favorable inflation outlook could cause the apex bank to hang its tools

Thus far, consumer prices seem to have adjusted to the new norm – frequent episodes of fuel scarcity and higher pump prices. Thus, we have observed a sustained decline in month-on-month inflation. Our models suggest inflation could be peaking soon, especially as the low base effect fades gradually. Thus, we see room for further acceleration to 21.33% y/y in November. Our full-year inflation estimate has also been adjusted to 18.70% y/y (2021: 16.98% y/y).

Given the sustained deceleration in month-on-month inflation and the triple measures taken to curb money demand growth (MPR, CRR, and new Naira notes), we expect the apex bank to maintain interest rates at current levels in the last MPC meeting of the year.