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October Inflation Review - Headline inflation accelerates to 14.23% y/y in Oct’20

Inflation kept its upward pace, rising to 14.23% y/y (Vetiva: 14.30% y/y) in the month of October; 52bps above the outcome in September. As a result of supply chain disruptions by the nationwide protests and the elevated cost environment, headline inflation rose for the fourteenth consecutive month. Despite the suspension of the proposed electricity tariff hike and relatively flat PMS prices (compared to September), inflation rose due to the passthrough effect of earlier reforms to commodities. Meanwhile, a couple of supply-side shocks contributed to the uptick in food inflation, which rose to a 32-month high of 17.37% y/y (Sept 20: 16.66% y/y). Filtering into non-edible items, higher fuel prices lifted core inflation to a 29-month high of 11.14% y/y (Sept 20: 10.58% y/y). Inflation kept its upward pace, rising to 14.23% y/y (Vetiva: 14.30% y/y) in the month of October; 52bps above the outcome in September. As a result of supply chain disruptions by the nationwide protests and the elevated cost environment, headline inflation rose for the fourteenth consecutive month. Despite the suspension of the proposed electricity tariff hike and relatively flat PMS prices (compared to September), inflation rose due to the passthrough effect of earlier reforms to commodities. Meanwhile, a couple of supply-side shocks contributed to the uptick in food inflation, which rose to a 32-month high of 17.37% y/y (Sept 20: 16.66% y/y). Filtering into non-edible items, higher fuel prices lifted core inflation to a 29-month high of 11.14% y/y (Sept 20: 10.58% y/y).

Supply-side shocks incite food inflation

Food inflation encountered a triple whammy from adverse weather conditions, poor storage facilities and disruption of supply chains by the nationwide lockdown and recent protests. The lockdown imposed earlier in the year hindered farmers’ access to their farmlands, leading to missed planting seasons and by extension, reduced output during harvest time. Processed food faced similar challenges as access to raw materials were constrained during and after the lockdown amid export restrictions in some countries. Those alongside higher transport costs contributed to the rise in the non-alcoholic (+72bps) and alcoholic (+20bps) segments, which rose to 17.29% y/y and 10.80% y/y respectively.

Inflation to swell further

In the current month, we expect the aftermath of the protest-driven shock and energy reforms to amplify existing inflationary triggers, culminating in a 14.86% y/y rise in inflation. Apart from higher demurrage costs for delayed goods at the ports, replacement of looted and vandalized items will make commodities more expensive, given the FX environment. In addition, the increase in the wholesale price of Premium Motor Spirit (PMS) by the Nigerian National Petroleum Corporation (NNPC) could raise the pump price to ₦168 - ₦170 in the ongoing month, adding to existing pressures on commodity prices. The year has seen new inflationary pressures compounding the challenges experienced earlier. Following the effects of the VAT hike, a weaker naira, market-reflective energy prices and pandemic-induced supply chain disruptions, inflation has witnessed a continuous build up reversing gains made since 2017, as the country braces up for its second recession in five years. Inflation could record its longest streak of consecutive upticks driven by both reforms and supply side shocks. Due to the spillover effects of the protests and higher fuel prices, we raise our FY’20 inflation forecast to 13.19% y/y (2019: 11.73% y/y).