The National Bureau of Statistics released this afternoon its inflation data for the month of August. As was widely anticipated and consistent with our forecast, Nigeria’s official headline inflation came in at 20.52%. This represents the seventh consecutive monthly increase and the highest inflation rate since 17years. Principal commodities driving up the price level include bread, cereal, yam, meat and oil. A further look at the numbers reveals a slight deceleration in the monthly food basket to 1.98%. Not surprisingly, this is partially due to the harvest seasonality effect. 

The increased output of farm produce especially cash crops must have played a major role in price moderation. Also evident was the impact of imported inflation arising partly from a weaker naira in the forex market. The prices of imported food items like flour have increased by 10.42%. Core inflation, which is inflation less farm produce and energy, surged by 0.94% to 17.20%. Whenever there is an increase in core inflation just like in the US this month, it is an indicative of a much more structural cause of inflation rather than transient or temporary price increase. Whilst most of the sub-indices increased in tandem with the headline inflation rate, month-on-month inflation reduced slightly to 1.77%. The YTD increase in inflation is 17.07%. 

Once again, Nigeria inflation moved in the same direction as some other countries. In August, inflation increased in Ghana to 33.9% and in Uganda to 9%. The global food price index declined for the fifth consecutive month by 1.99% to 139 points in August.

Global Inflation keeps easing 

Report showed that the US inflation rate had slowed by 0.2% to 8.3% in August but still close to a four-decade high. This is coming at a period when the projected expectation was 6.7%. But, the fright of continuous increase in the inflationary pressures is somewhat subdued. In August, the price of gasoline sharply declined in the US to $ 3.71 per gallon down by 26% from its peak in June. Despite the sharp decline in gasoline price, broad price pressures have remained resilient in the US. This made the federal Reserve to keep raising interest rates to fight inflation. As the world’s largest economy (25% of GDP), any signal of slowing inflation could indicate an improvement in global inflation. 

In the UK inflation rate slowed in August by 0.2% to 9.9%. Although, high inflation still takes its toll on consumption and investment in the country. The Bank of England in August projected the country’s economy would enter a recession at year-end. 

Nigeria and other African economies may record a lower inflation rate in the coming month. However, inflation is not only affected by global price movement but also volatility of currency. Currency volatility may hinder the effect of lower global commodity prices. Also, the moderate decline in global inflation could cause advanced and African economies to leave interest rates unchanged. This would lead to increased economic activities and eventually improve output and growth. 

Inflation Breakdown 

Food sub-index 

Food inflation (year-on-year) increased by 1.1% to 23.12% in August. However, month-on-month food inflation declined marginally by 0.06% to 1.98% in August, as a result of the commencement of the harvest season.

Core sub-index 

Core inflation, which is inflation less seasonality, continued its upward trend to17.20% from 16.26% in July. Conversely, month-on-month core inflation declined to 1.59% in August. The core inflation rate is currently above the primary t/bills rate of 8.5%. This implies a negative real rate of return. 

Urban-Rural inflation both increased 

Inflation increased in the urban sub-index and slowed in the rural sub-index in August. Rural inflation rose by 0.90% to 20.12% (year-on-year), while it declined to 1.75% (compared to 1.82% in July) on a monthly basis. Also, the annual urban sub-index slowed by 0.86% to 20.95% while the monthly sub-index slowed slightly by 0.03% to 1.79%. However, the rate of decline in urban inflation was steeper than rural inflation in August. This is due to a decline in the price of diesel that has aided the supply to urban cities. 

State-by-state analysis 

All the states except recorded an ease in inflation. Kwara, Ebonyi and Rivers states are the top three states with the highest inflation rate. Whilst Jigawa, Zamfara and Oyo states take the position of states with lowest inflation.

Kwara recorded the highest inflation rate in August (30.80%), followed by Ebonyi (28.06%) and Rivers (27.64%). The states with the lowest inflation rates are predominantly in the Northern part of Nigeria: Jigawa (17.77%), Zamfara (18.79%) and Oyo (19.80%). These states are benefiting from the increase in output due to harvest season. 

Sub-Saharan Africa: Inflation continues to spiral 

Except Nigeria and Uganda, most of the Sub-Saharan African (SSA) countries adopted an accommodative stance. Irrespective of the policy decision, it was observed that most of the Sub-Saharan African countries reviewed recorded an increase in the inflation rate. As such, the effect of the decline in the global food prices is not yet felt. This is due to currency pressures, disruption in the supply chain and numerous structural challenges affecting productivity in individual countries.

Outlook 

We expect the slowdown in the rate at which inflationary trends increase to continue in September due to the effect of the harvest season and some stability in the exchange rate. This should be a focal consideration at the next monetary policy committee meeting and increase the probability of leaving the interest rate stance unchanged. 

However, the risk to this trend remains with the likely passage of the current wage review of public lecturers. And the money supply will increase coupled with the release of funds for election campaigns. The increased liquidity will cause demand pull effect which could compound inflationary pressure. Although, harvest season might increase output, which could have a further positive effect on the food basket.