Headline inflation creeps up to 33.69%

The National Bureau of Statistics published its April 2024 CPI and Inflation report yesterday. As widely predicted, headline inflation continued its upward trajectory, reaching a 28-year high of 33.69%, up from 33.2% in March. However, the increase was not as substantial as anticipated by many analysts, who had forecasted a rate between 34% and 35%, considering factors such as petrol scarcity, electricity tariff hikes, and renewed forex pressures. This lower-than-expected rise in inflation could be attributed to consumer resistance to higher prices, stemming from reduced real income, potentially resulting in a limited transmission effect of increased costs on prices. It is also possible that the national inflation survey was conducted before these developments, which began towards the end of the month.Month-to-month inflation decreased by 0.73% to 2.29%, yet risks remain heightened. Significantly, month-on-month inflation decelerated by 0.73% to 2.29% in April, down from 3.02% in March. This marks the second consecutive monthly slowdown, and if this trend continues, it could indicate that headline inflation might be approaching its peak. However, there is an upside risk to this scenario, stemming from the rise in core inflation, which is inflation excluding volatile items such as food and energy. Core inflation accelerated to 26.84% in April from 25.9% in March, and it could further increase in the coming months if the recent depreciation of the exchange rate persists and if fuel scarcity is prolonged than necessary.

Nigeria ranks 4th highest in food inflation in Africa (40.53%)

Food inflation, constituting a significant portion of Nigeria's inflation index, increased to 40.53% in April, up from 40.01% in March. This rise reflects the effects of the planting season and various logistical and structural constraints. Nigeria remains the fourth country in Africa with the highest food inflation rate, trailing behind Zimbabwe (105%), Egypt (45%), and Sierra Leone (42.1%).

CBN to maintain its hawkish stance

The Monetary Policy Committee (MPC) has convened twice this year, implementing a cumulative increase of 600 basis points in the monetary policy rate, reaching 24.75%. These hikes, with 400 bps in February and 200 bps in March, were aimed at mitigating inflationary and exchange rate pressures. Unlike previous rate adjustments, this increase in the Monetary Policy Rate (MPR) has been notably effective in influencing other interest rates, encouraging investment in fixed-income securities, and ultimately reducing system-wide liquidity. Moreover, the aggressive rate hike was complemented by forex reforms, which encouraged increased Foreign Portfolio Investment (FPI) inflows, resulting in an appreciation of the exchange rate, with the Naira strengthening to N1,055/$ in April from N1.915/$ in February. However, recent times have seen a resumption of the Naira's steady depreciation in both official and parallel markets due to diminished dollar supply and renewed speculative activities, heightening concerns of prolonged elevated inflation.

These challenges will be discussed at the upcoming MPC meeting next week (May 20/21). While the moderate inflation growth could offer some respite, the committee will remain vigilant regarding potential inflationary risks arising from renewed petrol scarcity and currency pressures. Consequently, it is probable that the committee will uphold its hawkish monetary policy stance during this meeting.

How will this impact the market?

• Fixed-income securities will continue to respond positively to the CBN’s hawkish monetary stance.
• Stock market performance is likely to remain bearish as the high yield in the fixed-income market squeezes liquidity available to take a position in the equities market.
• Government borrowing will continue to crowd out private investment, weighing on the performance of the real sector, which is mostly job-elastic.
• Consumers will continue to grapple with squeezed wallets as commodity prices remain elevated, putting pressure on household budgets.