Headline inflation is projected to rise to 34.5% as petrol scarcity resurfaces and Naira weakens

Inflation has become a focal point not just in Nigeria but also globally, compelling policymakers to extend their hawkish stance beyond initial expectations. In Nigeria, the National Bureau of Statistics is set to unveil its CPI and inflation report for April this week. Based on our model, headline inflation, which measures the year-on-year change in the price of commodities is projected to continue its upward trajectory, rising to 34.5% from 33.2% in March. This would mark the 16th consecutive monthly increase, reaching the highest inflation rate in almost 30 years. Meanwhile, the monthly inflation rate is expected to slow to 2.93% (annualized at 41.38%) from 3.02% (42.84% annualized) in March.

Consumer price inflation to remain high for a longer period

Contrary to earlier forecasts anticipating a peak in inflation during Q2 followed by a subsequent slowdown, the resurgence of petrol scarcity and its ripple effect on prices, coupled with the recent Naira depreciation and the electricity tariff hike (especially for the Band A customers), are likely to keep consumer price inflation elevated for a longer period than initially envisioned. Additionally, the ongoing planting season, which typically peaks in the second quarter, is expected to exacerbate supply shortages, further driving up commodity prices. Notably, food and core inflation sub-indices are expected to climb to 41.94% and 26.63% from 40.01% and 25.9% respectively in March.

MPC to maintain its hawkish monetary stance in May

The sustained upward pressure on prices is likely to prompt the Central Bank of Nigeria (CBN) to persist with its hawkish monetary policy stance during its upcoming meeting on May 20/21. The Monetary Policy Committee (MPC) had previously raised the monetary policy rate (MPR) by a cumulative 600 basis points in its first two meetings of the year to curb inflation and support Naira stability. This adjustment in the policy rate has proven effective in influencing other interest rates, particularly in the fixed-income market. The resultant increase in effective interest rates has reduced the negative real rate of return on investments, encouraging savings and reducing system-wide liquidity.

More importantly, the higher effective interest rates have attracted Foreign Portfolio Investment (FPI) flows, as foreign investors capitalized on the elevated yields in the fixed-income market, thereby augmenting the supply of dollars. This led to an appreciation in the value of the currency, making the Naira the best-performing currency in April. However, the currency has resumed steady depreciation in recent times due to reduced dollar supply and renewed speculative activities. The Naira weakened to N1,480/$ on May 10 from N1,055/$ on April 16.

Rising inflation – Impact on You?

As we navigate through these economic dynamics, it is essential to stay vigilant and adapt our strategies accordingly.