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September 2020 Inflation - Inflation accelerates to 31-month high, hits 13.71% in Sept’20

Inflation accelerates to 31-month high, hits 13.71% in Sept’20

Inflation accelerates to 31-month high, hits 13.71% in Sept’20 In September, inflation rose by 49bps to 13.71% y/y, 4bps above our estimate (Vetiva: 13.67% y/y) due to sustained energy reforms and the fall in the value of the Naira. During the month, the pump price of Premium Motor Spirit (PMS) was raised from ₦148 in August to ₦151.56 in September, representing the third consecutive hike since June. Few days later, the Federal Government announced that it would no longer fix price bands. The subsequent rise in electricity tariffs also contributed to higher prices despite its suspension late in the month. On a m/m basis, inflation rose to 1.48% (Aug 20: 1.34%). Food inflation rose for the fourteenth consecutive month to 16.66% y/y (v/s 16.00% y/y in August), while core-inflation rose 6bps to a 28-month high of 10.58% y/y (vs 10.52% y/y in August).

Food inflation on the rise as flooding hinders food supply.

Food prices continued to soar as floods interfered with the supply of rice, despite the harvest season, amid closed borders. Higher transport costs also infiltrated into food prices causing a 16.66% y/y rise in September. Both non-alcoholic (+66bps) and alcoholic (+19bps) segments remained on the uptrend, rising to 16.57% and 10.59% respectively.

Food inflation rose to 1.67% on a monthly basis representing the sixth consecutive rise in inflation since the full lockdown that started at the end of February. Imported food inflation rose to 16.44% y/y in September, which is its highest in 13 months. Since the border closure, prices of food imports have accelerated due to the extension of forex restrictions to milk and maize. The intention to restrict food imports from FX may generate more pressure on the segment."
Inflation to maintain upward pace as headwinds remainPrices have been upset by structural changes, adverse weather conditions and FX reforms in the country. We expect the uptrend in inflation to persist, informing a 14.30% y/y rise in the ongoing month. The inelastic nature of the basket of goods measured under the CPI supports the pass-through of price increases to the final consumer. Given the blow dealt to oil prices and by extension, the revenues of the Federal government, the government had decided to phase out subsidies thereby informing the twin reforms in the petroleum and electricity sectors. Labour union negotiations are ongoing to address the welfare impact of the decision, as the reforms erode the purchasing power of minimum wage increases delivered a year earlier. Combining this with the devaluation of the Naira and exclusion of further items from the official list, inflation has sustained its upward momentum. Therefore, we raise our inflation forecast from 13.10% to 13.21% for FY’20 (FY’19: 11.39%).