CPI Report: Headline Inflation Reaches 20-Month High of 12.0%

Nigeria’s latest Consumer Price Index (CPI) data revealed a rise in headline inflation rate to a 20-month high of 12.0% y/y in December 2019 from 11.9% in the prior month. This means average monthly inflation rate was 11.4% in 2019, below our revised estimate of 11.5% and amoderation from 12.2% in 2018.

The uptrend in headline inflation was despite a slower m/m increase at 0.9% from 1.0% in November 2019. On a related note, the food index rose slower on a monthly basis by 1.0% from 1.3% in the previous month. However, there was a sharp increase in food inflation to 14.7% in December from 14.5%, the highest since April 2018. We attribute the notable rise in food inflation to a weak base and the ongoing land border closure with neighbouring countries.

Meanwhile, imported food inflation rose 4bps to 16.0% as the m/m increase remained unchanged at 1.3%, although still elevated. On the flip side, only the core index rose faster on a monthly basis with a 2bps m/m increase to 0.8%. As a result, core inflation advanced to 9.3% y/y from 9.0% in the previous month. We suspect that the uptick recorded in core inflation reflected rising demand for non-food items during the festive season.

Although the moderation in m/m inflation in December could indicate easing food price pressures, the level recorded in the food basket was still the highest in the months of December since 2016. Hence, it would be premature to suggest that the impact of the border closure on prices is thinning.

In the immediate term, we foresee sustained pressure on consumer prices on the back of the extended land border closure and the increase in VAT rate to 7.5% from 5.0%, for which implementation is expected to start February 2020. However, early implementation of the new VAT increase by some companies means that we could start to see the impact from January 2020 numbers. In the short-term, the upward review of electricity tariff and the onset of planting activities are downside risk factors to inflation.