Headline inflation to creep up to 34.01% in June

The tight monetary policies implemented by central banks and their effects on businesses and households have heightened the focus of economic agents on inflation trends in developed and developing economies. Fortunately, inflation appears to be tapering in most advanced economies with the US recording the third consecutive monthly decline to 3% in June. Inflation in the UK also moderated to 2% (the fourth straight month of decline), aligning with the Central Bank’s target. Some African countries are also beginning to experience a deceleration in pricing pressures. Of the twelve African countries that have released their inflation figures for June, eight recorded declines, one was flat, and three posted increases.

The National Bureau of Statistics, which is the official data release entity in Nigeria will release the CPI and inflation data for June next week (July 15). Based on our model, headline inflation is expected to maintain its upward trend, rising to 34.01% from 33.95% in May. This would be the 18th consecutive monthly increase and the highest inflation rate in 28 years. While inflation is projected to increase again, it is worth noting that the pace of increase is gradually slowing, suggesting that inflation could peak soon and begin to decelerate. This slow pace of increase can be largely attributed to the relative stability in the exchange rate, resulting from the CBN policy measures and aggressive rate hikes. The Naira traded within a range of N1,470/$ - N1,520/$ in June.

Month-on-month inflation to increase due to seasonal effects

A major concern, however, is that month-on-month inflation, which has declined consistently since March 2024, is likely to increase to 2.17% (annualized at 29.36%) in June due to seasonal effects (planting season and Id-el-Kabir celebration). However, it is likely to decline in subsequent months as the harvest season begins, boosting commodity supply.

Food inflation – There appears to be light at the end of the tunnel

Food inflation has remained a major driver of inflation in Nigeria, accounting for over 50% of the inflation basket. The food price index has increased consistently in the last 17 months, climbing to 40.66% in May 2024, and is projected to increase further to 40.8% in June due to the planting season effect, heightened insecurity in the food belt, higher logistics costs, and infrastructural deficit amongst other factors. The escalating food prices have heightened the financial burden on households, leading to increased poverty, hunger, and malnutrition rates. According to the National Bureau of Statistics, an average Nigerian household spent 56.65% of total expenditure on food in 2019. A more recent report by Picodi, an international e-commerce organization stated that Nigerian households spend 59% of their income on food.

To address the issue of rising food costs, the Federal Government has implemented a 150-day duty-free period for importing maize, husked brown rice, wheat, and cowpeas which are essential household staples. This means that these items can be brought into the country without customs duties for the next five months, potentially leading to short-term price reductions. This measure is expected to positively impact both businesses and households. Companies that use these staples as raw materials will see a reduction in operating expenses, thereby increasing profitability. Households will benefit from lower prices for these staples and their derivatives.

However, while this initiative is likely to have short-term benefits, there is a need for a focus on achieving sustainable food security. This involves addressing the underlying causes of food inflation, such as enhancing local production, resolving security issues in key agricultural areas, and creating a more resilient supply chain.

Monetary Policy Decision The MPC is scheduled to hold its fourth meeting of the year on July 22/23. While the slow pace of increase in inflation will come as a relief, we do not expect the committee to begin rate cuts anytime soon. At best, the committee will leave all monetary parameters unchanged while monitoring the impact of previous rate hikes.