Fuel Scarcity and Naira Redesign Policy Push Inflation Up 21.82% in January

The January 2023 CPI report released by the National Bureau of Statistics (NBS) on Wednesday showed that the inflation rate rose 48 basis points to 21.82% last month, another record high. January’s numbers exceeded Analysts’ expectations even though Analysts had correctly predicted that the nationwide fuel scarcity and the prevalent black market would send inflation rising again.  Inflation which declined to 21.34% in December on the back of a sober-than-expected festive period inched upward on the back of the 2.3% depreciation of the Naira based on the indicative parallel market rate from N736/USD 1$ to N753//USD$1 in the period. Using the rule of 70, a thousand naira held as idle cash would be worth only N500 in 3 years while Treasury investors focused on the 364-day tenor face a negative real yield with the yield offered during the recent CBN auction coming at just 7.3% (see chart 1 below).

Chart 1: 

A closer look at the major components of the CPI survey suggests that:

• The food sub-index rose to 24.32% in January from 20.94% in December.
• The core component rose from 18.49% to 19.16% in January. 

A further breakdown of the basket of commodities surveyed showed that annual Inflation was shaped by three large components, namely, Food (24.32%) Transport (21.02%) and Imported Food (18.49%).  Analysts believe that rapid growth in food price would lead to the impoverishment of many households. Households spend between 50% and 60% of their incomes on food and transportation (see table 1 below)

Illustration 1: 

Analyzing the Rural-Urban interaction with Inflation in January, analysts noted that inflation rose to 21.13% from 20.72% in rural areas while urban Inflation rose to 22.55% from 22.01% in December suggesting that urban inflation pulled the over index up. In terms of States, Food prices rose fastest in Lagos recording a monthly inflation rate of 3.67%, followed by Kwara and Kogi which equally recorded high inflation rates of 3.28% and 2.97% respectively.

Naira Redesign and Nigeria’s Inflation Outlook

The depreciation of the Naira is expected to have worsened the inflation outlook for February. While the Central Bank and a few analysts had forecast that inflation would moderate on the back of the cash crunch which hit the economy after the removal of N2.1trn from money out of the bank, January data once again confirms that currency-in-circulation, being a small fraction of the total money supply, is too little to affect inflation substantially. On the contrary, the uncertainty surrounding the Naira redesign policy spurred huge speculative demand for both the Naira and FX, a situation which portends further worsening of inflation in the near term. The Naira redesign policy created a peculiar currency risk that would continue to feed into the cost of transactions and overall inflation. Pump prices of premium motor spirit (PMS) or petrol have declined but are still relatively higher than the prices in the corresponding period of last year, explaining analysts’ view that energy Inflation would stay high.

Eyeballing the Next Monetary Policy Meeting

The Central Bank’s Monetary Policy Committee (MPC) meets in March, and we believe that the recent data will be considered closely. While addressing the Diplomatic Corp to the CBN governor’s address at the Ministry of Foreign Affairs was particularly hawkish indicative of further monetary policy tightening. Having voted unanimously for another rate hike at its January meeting, analysts say that the Monetary Policy Committee (MPC) would be further encouraged to tighten January Inflation numbers by another 50 -100bp when it meets in March.  Although Analysts agree that the CBN is right to prioritize tamping down on inflation the committee is advised to address the speculative demand for FX which affect prices at the end of domestic producers and importers.