In brief
- The headline inflation rate in Nigeria continued its upward trend for the fourth month in a row, rising to 22.4% y/y in May 2023 from 22.2% in April 2023. The sustained uptick in Nigeria’s inflation remains consistent with market expectations, given the supply chain issues in the agricultural zones amidst FX challenges.
- Food inflation (24.8%), which accounted for 11.6% of the headline inflation, continues to fuel the momentum in general price levels. Supply chain bottlenecks, high fuel price and the devaluation of the naira on the parallel market explain the pressure on food prices.
- The removal of fuel subsidies at the end of May 2023 resulted in the tripling of domestic ex-pump prices, leading to skyrocketing transport fares and higher food and electricity prices. We believe that this pressure is not fully perceptible in the May 2023 inflation figures due to the time differential between the policy implementation and the May 2023 CPI data.
- We foresee elevated price pressures ahead as we expect the removal of fuel subsidies and the unification of the Naira exchange rates to heat up price pressures in 2H2023.
- While we maintain that Nigeria’s inflation is mostly driven by non-monetary factors, the heightened upside risk emanating from the ongoing reforms raises our expectation that the Monetary Policy Committee will continue on its hawkish path. However, we do not rule out a “hold” decision after President Tinubu signalled lower interest rate expectation in his inauguration speech.
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