The Nigerian inflationary environment worsened in 2022 as we saw increased price pressures throughout the year, with the headline inflation crossing the 20.0% y/y region in Aug-2022 for the first time since 2005. Following a year of moderated price increases influenced by the high base effect in 2020, 2022 was a different ball game as renewed price pressures dominated the macroeconomic space owing to the impact of low food supply, high energy prices, and FX crisis. Notably, headline inflation, according to the National Bureau of Statistics (NBS), printed at 21.5% y/y in Nov-2022 compared to 21.1% in the prior month. The food sub-index remains the primary driver of inflation, printing at 24.1% y/y, due to persistent food supply shortages and rising cost of farming (higher input costs and unresolved legacy bottlenecks).
In response to the rising inflationary pressures in the economy, the Monetary Policy Committee (MPC) adopted an aggressive monetary policy tone for a major part of 2022. The MPC hiked the Monetary Policy Rate (MPR) by a cumulative +500bps to close the year at 16.5%. In addition, the hawkish monetary policy stance by major central banks around the globe caused by rising global inflation numbers was another major consideration. Thus, the Central Bank resorted to hike the MPR to remain attractive to foreign investors and defend capital inflows into the country. However, questions remain unanswered as regards the efficacy of the rate hikes as a significant component of Nigeria’s inflationary pressures are broadly cost-push related.
Looking forward, we expect sustained price pressures till the end of the year due to increased demand from the festive activities. However, we project December inflation to print at 21.0%, 44bps lower than November’s figure, bringing average inflation rate in 2022 to 18.7%, 176bps higher than 2021’s average. That said, we expect inflationary pressures to continue to moderate (from Dec-2022) in 2023 largely supported by the high base effect from 2022. Nevertheless, we note that the removal of fuel subsidy by Jun-2023 may serve as a downside to our projections.