In brief
- Nigeria’s headline inflation continued its ascent to all-time highs, surging 129bps to 24.1% y/y in July 2023. The surge in headline inflation reflects the pass-through of reforms-induced cost pressures and FX volatility, whose impact was muted in the June 2023 CPI data due to time lag effect.
- Unsurprisingly, food inflation accelerated by 173bps to 27.0% y/y and accounted for 12.5% of the headline inflation for July 2023, the most significant share. We also observed strong pressures from cost-push factors, on account of the fuel subsidy removal and transport fare hikes, which had a domino effect on distribution of farm produce.
- Although the high and rising core inflation (20.5% y/y) emphasizes the underlying price pressures, we believe the relatively lower uptick (without food CPI) underscores the uncertainty around food prices with continued near-term risks to the upside. Russia’s suspension of the Black Sea Grain Initiative amidst the El Nino weather concerns will contribute to fueling imported food inflation while the persistent security challenges continue to disrupt local food supply chains.
- On the forex market, we believe market concerns around the low FX reserves (adjusted for encumbrances) will continue to weigh on the Naira in the near-term, with upside risk to CPI inflation.
- While persistently volatile FX suggests continued monetary tightening, the token hike in the policy rate in July 2023 signalled the MPC’s admission of stronger influence from non-monetary drivers of inflation. Against this backdrop, we believe the next MPC decision will be complicated by cost-push and supply-side factors amidst the FX pressures.
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