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Inflation Surges to 19.64% in July 2022, as Analysts Point to Weakening Naira

Nigerians are staring down the barrel of an inflationary weapon of mass destruction. The country’s consumer price index (CPI) becomes weaponized to eliminate disposable income in three and a half years or by 2026. Analysts note that using the rule of seventy, the real disposable income of Nigerians would be fifty percent lower in less than half a decade.

Put differently, the average Nigerian household would need a hundred percent rise in income by 2026 to retain the same living standards as in 2022.

 The recently released CPI report by the National Bureau of Statistics showed that inflation rose to +19.64% in July, resulting in a nearly two-decade high. The July 2022 figure was 104bp higher than +18.60% in June. The inflation rate appears to have fed off a depreciating exchange rate. The Naira breached the N700/$ threshold for the first time in July 2022 after the Central Bank of Nigeria (CBN) stated that the NNPC had failed to remit revenues to the foreign reserve account. 

Analysts believe the fall in reserves was one of several factors responsible for the decline of the Naira. Speculative demand for the dollar has occurred partly by a larger than usual increase in money supply and widespread adverse sentiments over the Naira. The seasonal demand by students in foreign schools and the dollar demand for political spending towards the 2023 elections allegedly contributed to the Naira slide in FX markets. 

Available data shows that the country’s purchasing managers index (PMI) had strengthened in July to 53.2, up from 50.9 in June, despite the multiple policy rate hikes by the CBN’s Monetary Policy Committee (MPC) in its last two meetings. The Monetary Policy Committee will meet in September to discuss inflation and GDP growth for H1 2022.

The outcome of the MPC meeting in September may not stop Investors from bemoaning the rising negative inflation-adjusted returns on investor portfolios as domestic prices rise. The 10-year FGN bond offers (a 12.68%) yield compared to the 17-year inflation of 19.64 and offers a negative inflation-adjusted return. The same applies to other fixed-income tenors. Meanwhile, poorer households face tougher times as the rise in food prices leaves them with weak purchasing power and materially devalued savings. A look at the basket of items surveyed by the Bureau in July shows that Food and Beverage costs rose fastest by 21.94%, followed by Imported Food (17.91%), Clothing and Footwear (17.73%), Energy, and Housing. Electricity and Transport also recorded higher inflation rates in July (see Illustration 1 below).

Illustration 1: Drivers of Inflation (Y-o-Y ) Inflation July & June

The latest inflation figure pushes Nigeria’s average inflation for 2022 to +17.14% up from +16.72% as of H1 2022. Over the corresponding period in 2021, the inflation rate was +17.59%. Proshare analysts have upwardly reviewed Nigeria’s inflation outlook for FY 2022 to +19.24% (up from +16.98% in FY2021), given the average monthly CPI growth, while annual inflation could hit +23% by December.

With inflation rising to a 17-year high in July, the Monetary Policy Committee (MPC) is expected to review the continuous surge in inflation along with the Q2 GDP figures to guide its decision. However, judging by the voting pattern in the last meeting, Analysts believe the MPC would continue with its hawkish stance.

Headline Inflation: Buzzing without Joy

General inflation in July came in at +19.64%, suggesting that the Consumer Price Index increased by +19.64% in July 2022 compared to July 2021. This is higher than the +18.6% annual rate at which prices rose in June 2021 (see Chart 1 below).

Chart 1: Nigeria’s Headline Inflation Rate (Y-O-Y) May 2021 – July 2022 (%)

Source: NBS, Proshare Research

Month-on-month (M-o-M), the general price level rose by +1.82% in July- the highest in months. The prices in July were on average +1.82% higher than in June. M-o-M- inflation has mirrored the headline rate (see Chart 2 below).

Chart 2: Nigeria’s Headline Inflation Rate(M-o-M)   May 2021 – July 2022 (%)

Food Inflation: Nigerians Survived a Stomach Squeeze

The food sub-index recorded a year-on-year increase of +22.02%, suggesting that Nigerians paid for food in July is on average +22.02% higher than the price in 2021. The figure is up 141bp than the +20.60% food inflation recorded in June 2022 (see Chart 3 below).

Chart 3: Nigeria’s Food Inflation Rate May 2021- July 2022(%)

Monthly food CPI shows that food prices rose by +2.04% in July, which marks a 1bp moderation in monthly food inflation. Analysts attribute the slight moderation in monthly inflation to the reduction in Tomatoes, Garri, and Yam prices. (See Chart 4 below)

Chart 4: Nigeria’s Food Inflation Rate July 2021- July 2022(%)

Source: NBS, Proshare Research

Core Inflation: Dodges Farm and Energy Cost but Hurts Consumers’ Pockets

The prices of non-farm products rose by +16.26% year-on-year in July. NBS figures suggest that the price of items in the core subindex was +16.26% higher in July 2022 than in July 2021. The recent figure shows that core inflation recorded the swiftest rise in the sub-index since January 2017 (see Chart 5 below).

 Chart 5: Nigeria’s Core Inflation Rate May 2021 – July 2022 (%)

Source: NBS, Proshare Research

Monthly, prices in the core sub-index rose by +1.75%,  which was a higher rate than the 1.56% rate at which prices of non-farm items rose in June 2022 (see chart 6 below).

Chart 6: Nigeria’s Core Inflation Rate (M-o-M) May 2021 – July 2022 (%)

Urban and Rural Inflation: Different Folks and Strokes

In July, urban inflation rose to 20.09% Y-o-Y, up from 19.09% in June, suggesting that the prices in urban centers outpaced the overall inflation rate (19.64%). In July, the prices of food (2.09%) and Transport (1.7%) grew fastest in Urban centers. Rural inflation peaked at 19.22%, up from 18.13% in July 2022. Food and Transport also contributed majorly to the rise in prices.

Last month, states that recorded the highest overall inflation were Kogi, Bayelsa, and the Rivers States. Regarding food inflation, Kwara state recorded a swift increase in its food CPI; in the customized basket of commodities, there was a 29.28% increase in July compared to the CPI in July last year. Akwa Ibom (27.22%), Kogi (26.08%), and Ebonyi (25.83%) State also recorded elevated food inflation the previous month (see Chart 7 below).

Chart 7: Headline and Food Inflation for States (%) July 2022

Inflation Abroad: Mountain Climbs

The decline in gasoline prices gave respite to households in the US. as inflation fell slightly to +8.5% in July. However, analysts believe that the housing and food prices remained high despite the decline in the global food index and the 225bp rise in the base rate, which the Federal Reserve had affected since March when it started hiking the Federal Funds Rate. The moderation in the US inflation rate coincided with a Non-Farm Payroll report that suggests that the US economy is still resilient despite suffering two consecutive negative real GDP growth.

While some analysts speculate that the Fed may adopt a more dovish stance, inflation in the world’s largest economy remains at a 40-year high, encouraging the Fed to continue with an equally aggressive rate hike. Analysts would be looking to the Fed Chairman’s speech at the upcoming Jackson hole summit to get a sense of the policy direction of the financial system regulator. The US federal funds rate hikes have supported the dollar to gain the Euro and the Yuan. 

In the UK, inflation remains at a record high (+10.1% in July 2022), putting pressure on households, especially as recent average pay increased slower. According to the Office of National Statistics, wages in the UK only rose by 4.7% between April and June. Analysts forecast inflation to rise to +13% when the energy price cap comes off in October.

 End Note:   Looking into the Deep Blue

Crude oil prices declined 5% in the last two trading sessions amid renewed hopes of reaching an Iranian nuclear deal. Global crude oil demand forecast also declined following the bleak economic data from China due to the country’s Zero-COVID policy and a property sector crisis that has seen the Chinese government introduce several socioeconomic supports. Meanwhile, concerns around hot, dry weather will continue to raise the prices of Wheat, Soybeans, and Corn (see Chart 8 below).

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