Nigeria’s headline inflation came in almost flat at 21.91% in February. The major commodities that drove the rise in the price level were bread, cereal, potatoes, yam, and other tubers. The marginal increase in inflation was against the trend that would have seen an estimated increase of 22.41% all things being equal. 

Cash squeeze the known unknown 

February was a bizarre month in Nigeria, where a sudden extinguishing of 75% of cash in circulation almost brought the economy to a screeching halt. It was widely expected that inflation would decline by 0.86% to 20.96%. However, rather than decline, inflation stayed flat. There are various reasons for this outcome but one of the principal factors responsible for this moderation in inflation was a sharp drop in the velocity of circulation of money outside the banking system. 

Food inflation up, core inflation down 

Food inflation increased marginally by 0.03% to 22.35% driven by the usual suspects of increased prices of price inelastic and perishable products like bread, cereal, tomatoes potatoes, yam, and other tubers.

Interestingly, core inflation which measures inflation less seasonality declined by 0.32% to 18.84% from 19.16% in January. The decline in core inflation in February is the first since March 2022. 

The upward movement in inflation contradicts the global inflation trends. US inflation fell again for the eighth consecutive time in February to 6.0%. In the same vein, China's annual inflation rate fell to 1.0% in February 2023 from 2.1% in the prior month, the weakest point since February 2022. In the same vein, inflation declined to 8.5% in the EU in February from 8.6% in January. 

Nigerians all of a sudden saw the exaggerated effect of cash on the trading sector (wholesale and retail). Most noticeable is the impact of tips at various points in the service value chain from restaurants to bars and police checkpoints. Businesses were virtually paralyzed because of the cash effect on the economy. Nigeria’s inflation aside from December when inflation slowed on consumer price resistance has continued to skyrocket. Inflation rose by an average of 0.59% in the last 12 months.

Hence, a 0.09% increase in inflation in February indicates that price pressure reflects the current economic situation of squeezed purchasing power of consumers as a result of naira scarcity. The impact of the cash crunch is more pronounced in the core and month-on-month inflation numbers. But now that both old and new denominations remain legal tender, the reverse of the expectation is likely to occur. 

Inflation Breakdown 

Month-on-month inflation declined by 0.16% to 1.71% in February from 1.87% in January. The drop in monthly inflation indicates that on average, the general price level was lower compared to the previous month, implying that the significant domestic pricing pressures could be easing out. 

Food Sub-Index 

Food inflation (year-on-year) increased marginally by 0.03% to 24.35% in February from 24.32% in January. The slight uptick in food inflation was caused by an increase in the prices of commodities like bread and cereals, potatoes, fish, oil and fat. However, month-on[1]month food inflation dropped by 0.18% to 1.90% in February 2023 from 2.08% in the previous month. This was due to the squeeze in consumer income as a result of naira cash crunch.

Core sub-index 

Core inflation fell for the first time in 11 months to 18.84% in February from 19.16% in January. The fall in core inflation was associated with the decline in imported inflation as a result of the decline in inflation in countries like China where Nigeria imports from. Month-on-month core inflation dropped by 0.76 to 1.06% from 1.82% in the prior month. The decrease was partly due to the ease in fuel scarcity, and a relatively stable exchange rate at the parallel market. 

State by State Inflation 

A breakdown of inflation at the sub-national level shows that Kwara state topped the table with a headline inflation rate of 29.51%. Other high[1]inflation states include Imo State (27.47%) and Lagos (27.42%). Sokoto, Jigawa and Yobe states recorded the slowest rise in consumer prices on a year-on-year basis in February.

Outlook

Inflation is expected to increase again in March as the reversed policy on the old naira denominations could intensify the price pressure on domestic commodities, albeit slowly. We also expect the MPC to remain hawkish in its meeting on March 20 and 21.