Headline inflation bucks its 18 month upward trend in July (33.4%)

Consistent with our forecast and the projections of most analysts, headline inflation reversed its 18-month upward trend, declining to 33.4% in July. This represents a decrease of 0.79% from June’s rate of 34.19%. The drop in inflation is largely due to the high base effect from a year ago when the twin shock of petrol subsidy removal and Naira devaluation led to a surge in PMS prices and a significant depreciation of the currency. Similarly, the month-on-month sub-index slowed to 2.28% (annualized at 34.11%) from 2.31% in June (annualized at 31.53%). This suggests that the easing of price pressures is likely to continue in the coming months, particularly with the harvest season and the suspension of tariffs on key staples. The Naira is also expected to remain relatively stable, supported by the reintroduction of the retail Dutch auction and the upcoming issuance of Diaspora bonds.

Inflation Breakdown

Food inflation moderates as harvest season commences

Food inflation, which makes up more than half of the inflation basket, decreased as anticipated, falling below 40% to 39.53% (in line with our forecast of 39.3%) from 40.87% in June. This marks the first decline since December 2022, ending an 18-month upward trend. Similarly, month-on-month food inflation dipped by 0.08% to 2.47% from 2.55%. This slowdown in prices was largely driven by the harvest season. The positive trend is expected to persist in the coming months, supported by the ongoing harvest and the commencement of the 150-day duty-free period for importing essential staples like maize, husked brown rice, wheat, and cowpeas.

Core inflation increases slightly as structural issues linger

As predicted, the annual core inflation sub-index, which excludes food and energy costs, rose slightly by 0.07% to 27.47% in July (close to our forecast of 27.43%) from 27.4% in June. The monthly sub-index also inched up by 0.1% to 2.16% from 2.06% in the previous month. While the ongoing rise in core inflation highlights persistent structural challenges, the slower rate of increase indicates that the effects of PMS price hikes and currency depreciation are gradually diminishing. In the parallel market, the Naira traded within a range of N1,510/$ to N1,610/$ in July, up from N1,470/$ to N1,520/$ in June. With the reintroduction of the retail Dutch auction and the issuance of the Diaspora bond, we expect the currency to remain relatively stable in the near term.

Rural-Urban Inflation

Interestingly, both urban and rural inflation sub-indices declined on an annual basis in July. Urban inflation dropped by 0.78% to 35.77%, and rural inflation decreased by 0.83% to 31.26%. On a monthly basis, urban inflation remained steady at 2.46%, while rural inflation decreased slightly by 0.07% to 2.10%. This trend largely reflects the influence of the harvest season. Additionally, high logistics costs slowed the pace of price decreases in urban areas. The gap between urban and rural inflation widened to 4.51% in July from 4.46% in June.

State-by-state inflation

Benue State, known as the food basket, had the lowest inflation rate at 27.28%, followed by Delta at 28.06% and Borno at 28.33%. On the other hand, the highest inflation rates were recorded in conflict-prone Northern states, with Bauchi at 46.04%, Jigawa at 40.77%, and Kebbi at 37.47%. Inflation expectations

We expect inflation to decline further in the coming months, driven by the harvest season, the 150-day tariff suspension on major staples, and the relative stability of the Naira. The sustained deceleration in inflationary pressures will come as a relief to policymakers. As a result, we expect the committee to pause its interest rate hikes and likely maintain the status quo at the September meeting, while closely monitoring economic data. If the downward trend in inflation persists, the committee may consider initiating an interest rate cut in November.

Investment Corner

As an investor, it is important to stay ahead of economic trends and policies that could impact your investment portfolios. While the slowdown in inflation is positive for household purchasing power and business operating expenses, monetary policymakers will begin to consider rate cuts, which will have an impact on different investment classes. A financial expert can guide you through your investment journey. At GDL, your growth is our priority. If you have any questions or need assistance with your investment strategy, please don’t hesitate to reach out to us.