According to Nigeria’s National Bureau of Statistics (NBS) Inflation report for February 2023, the country’s Consumer Price Index (CPI) rose by 21.91% year-on-year (Y-o-Y). The Inflation rate defied analysts' earlier forecasts which put the likely rate to be between 20.9% and 21.2%.
The core sub-index recorded a reduction in inflation (disinflation) to 18.84% in February 2023 compared to 19.16% in January, while prices rose faster in the Food sub-index (24.35% in February compared to 24.32% in January). The expectation that inflation would fall in February was based on the severe cash crunch occasioned by the CBN’s Naira redesign and demonetization policy which severely affected cash-based transactions in the month. The data, however, appears to suggest that the impact of the demonetization policy was restricted to the monthly data while adverse exchange rate movement and higher energy costs governed annual inflation.
Meanwhile, the overall index on a month-on-month basis ran along a downward trajectory as expected, just as both the food and core sub-indexes dropped. Headline inflation fell from 1.87 to 1.71% between January and February, similarly, the food subindex showed a slower pace of price growth in February as core inflation declined from 1.82% to 1.06% while food inflation declined from 2.08% to 1.9%.
The February data, which marks another record high (the highest level of inflation since 2009) can be chalked up to higher inflation in Education (having added 51bp), Transport (adding 40.5bp), and Health (which added 44.62bp). Items that are typically exchanged in cash transactions notably recorded a disinflation. For instance, Alcoholic beverages, Recreation, and Culture recorded steep disinflation in the period. Analysts say the rise in inflation to 21.9% in February would have a direct implication on purchasing power of the average household. Savers or keepers of idle cash using the rule of 70, would see every 1000 naira worth only N500 in roughly 3 years.
For Investors, the further rise in inflation to 21.9% leaves portfolios with an even more negative real return. Compared to the stop rate on CBN’s recently issued 364-day security (which was 10%), the 21.91% inflation rate leaves investors in the fixed-income instrument fairly worse off. Yet, the implications of rapid price growth would prove to be more severe if we consider the fact that the basket of items surveyed monthly has not been reconstituted and rebased since 2009. Experts say that actual inflation may be close to 40% if the basket is reconstituted (see illustration below).
Illustration 1: Drivers of Inflation in February
The rise in annual inflation can be chalked up to:
- Depreciation in the Naira: the parallel market rate rose 2% in February to an average of N760/US$ from N748/US$ in January. The 30-day moving average of the rate at the IEFX window flatlined at N460/US$ in Jan. and Feb. That can be explained by the fact that 30-day MA of the country’s foreign reserves declined by $317m in February to N36.7bn. Adverse exchange rate movement typically accounts for 70% of changes in inflation.
- Diesel and Petroleum Products:
According to the NBS, the highest increases in the core sub-index were recorded in prices of Gas, Passenger Transport by Air, Liquid Fuel, Fuels, and Lubricants for Personal Transport Equipment, Vehicles Spare Parts, and Solid Fuel. The rise in fuel prices was even though the average price on the Brent contracts dropped slightly in February from US$83pb to US$82.4 pb on the back of market uncertainties.
- CBN’s Demonetization policy: with 36% of the transactions within the economy being cash-based, the contraction in currency-in-circulation reduced aggregate demand and some prices in the period. CBN money and credit statistics suggest that Currency outside of the Bank has declined by 1.78trn between Dec (N1.72tr) when the policy and January (N788bn).
A World Wrapped by Inflation
Globally, inflation is highest in Zimbabwe, Turkey, and Argentina. Inflation declined to 92.3% after the country’s statistical agency transitioned to a blended CPI which takes into consideration the dollarization of the economy. Following the sharp decline in the value of the domestic currency, 75% of domestic transactions are denominated in dollars. But the decline in inflation from 101.5% to 92.3% was associated with the tight monetary and fiscal stance of the authorities who expect that inflation would decline to between 10% and 30% at the end of this year. The situation in Turkey is different. The Turkish Central Bank has maintained an unorthodox monetary policy stance where rates are reduced in the face of rising inflation occasioned by the decline in the value of the Lira in a bid to support growth through cheaper exports. The Turkish Central Bank further reduced rates to 9% in its last meeting in January.
In Argentina, inflation surged to 102.5%, a 30-year high due to the government's large inflationary budget deficits used to fund the government's welfare scheme. Before now, rising inflation had necessitated the introduction of a 2,000 peso note just to manage the cost of printing the currency (see table below).
Outlook & Policy Committee Meeting
Notwithstanding the moderation in inflation in the core sub-index, our long-term inflation outlook is moderated by a no-change outlook for the country’s foreign reserves and the exchange rate, as well as the expected rise in petroleum prices after the removal of subsidies. The decline in month-on-month inflation observed in February is yet to constitute a trend. Moreover, the re-monetization of the old N500 and N1000 would reflate effective demand in 30 -60 days. Meanwhile, we expect a slight reduction in commodity prices to moderate, as we approach the dry season harvest of cassava, maize, rice, and yam.
The Central Bank’s Monetary Policy Committee (MPC) is set to meet next week and Q4 GDP numbers, and the recent inflation figures, would likely nudge it to retain a unanimously hawkish position. Citing the decline in PMI numbers, analysts say that the MPC must exercise caution not to tip the economy into a recession.