The National Bureau of Statistics released its inflation data for October today. In line with market expectation, headline inflation accelerated to a 17-year high of 21.09 on a year-on-year basis. This is 0.32% higher than the previous month’s inflation and 5.09% compared to same month in 2021. This inflation trend has defied the typical inflation pattern in Nigeria in which headline inflation moderates between September and November due to harvest season. The major drivers of inflation in October include flood[1]induced supply disruption, exchange rate volatility and rising cost of production. 

The Naira at the parallel market had depreciated by 9.01% to N805/$ in October from N738/$ at the end of September. Speculative demand for dollar in the second half of October following CBN’s Naira redesign initiative bookended the sharp fall in the exchange value of the Naira. The high and volatile exchange rate is the major culprit for skyrocketing cost of raw material and imported goods which in turn fueled inflation. In the same vein, flood, which ravaged about 26 dominant food-producing states, disrupted the food supply chain across the country, thereby muting the impact of harvest of farm produce on the headline inflation. However, on a month-on-month basis, the headline inflation declined by 0.12% to 1.24% from 1.36% in September, the third consecutive monthly decline since August

A further look at the numbers released also revealed that core inflation, which excludes farm produce, spiked on a year-on-year basis by 4.52% to 17.76% in October 2022. This suggests that Nigeria’s inflation is more structural than transitory. The CBN has raised the policy rate by a total of 400bps since May in a bid to tame inflation, which has become a global phenomenon. However, legacy constraints such as multiple exchange rates and capital controls, rising insecurity and persistent energy prices are pushing the general price high, defying the monetary antidotes. 

Inflation Data Breakdown

Food sub-index 

Food inflation (year-on-year) rose by 5.39% to 23.72% in October 2022 from 18.34% in the corresponding period last year. The culprit includes a surge in bread and cereals, yams, and oil and fat prices. However, month-on[1]month food inflation fell marginally by 0.20% to 1.23% in October 2022 (compared to1.43% in September) as a result of the harvest. 

Core sub-index 

Core inflation maintained its persistent uptick to 17.76% in October on a year-on-year basis, up by 4.52%, compared to 13.24% in October 2021. Conversely, month-on-month core inflation declined to 0.93% from 1.59% in September. Liquid fuel, gas, passenger transport (air), and vehicle spare parts were the largest contributors. 

Urban-Rural inflation surges 

The rural and urban sub-indices of the report showed that the rural-rural inflation on a year-on[1]year basis increased in October. The urban inflation rate (year-on-year) increased in October to 21.63%. This represents a 5.11% increase in October 2022 when compared to October 2021, which stood at 16.52%. Similarly, the rural inflation rate jumped by 5.09% to 20.57% (year-on-year) in October 2022 from 15.48% in the corresponding month in 2021. Nonetheless, both the rural and urban inflation declined on a month-on-month basis. 

State-by-state inflation 

A breakdown of the state of inflation at sub-national level shows that Kogi state topped the table with headline inflation rate of 25.15%. Other high inflation states include Bauchi (23.45%), Ondo (23.45%), and Bayelsa (23.0%). Plateau, Borno, and Nasarawa states recorded the slowest rise in consumer prices on a year-on-year basis in October.

Sub-Saharan Africa 

In spite of the quantitative tightening measure adopted by most countries in sub-Saharan Africa, inflation remained persistent across the region. Though global prices have seen a decline over four consecutive months, it is yet to translate into lower inflation in sub-Saharan Africa. This is due to, currency pressures, supply chain disruption, the level of institutional quality and other rigidities affecting these economies.

Africa is still racked by high inflation 

Structurally, though the high inflationary pressure ravaging Africa may differ across African countries, the current rising trend is a common phenomenon. Nigeria and its neighbouring and far-reaching fellow African countries are both experiencing high inflation. Ghana's inflation surged to 40.4% in October from 37.2% in September, and in Tanzania, it rose to 4.9% in October from 4.8% in September. Similarly, Ethiopia’s inflation surged to 31.7% in October from 30.7% in September. While the inflationary effect of the ongoing global headwinds remains muted in a few African countries (such as Zimbabwe and the Republic of Seychelles), persistent inflation amidst high interest rate environment has put several Africa countries under immense fiscal and financial pressure. 

Global prices maintain ease 

The global food price index indicates that global food prices fell 0.1% for the sixth consecutive month in October, to 135.9 points from 136 points in September, but remain higher than pre[1]Russian-Ukraine war levels. Looking at what is happening in leading economies globally, the US inflation rate slowed to 7.7% in October, the lowest since January. Although the US inflation has begun to taper, the Fed reinstated its commitment to bring inflation to its long-term target of 2%. This implies that although the US fed may become less hawkish, it may further raise its benchmark interest to 4.5%-5% range by mid-2023.In China, annual inflation fell to 2.1% in October, compared to 2.8% in September. The decline was driven largely by the food component and represents the lowest record since May this year. In Taiwan, inflation eased from 2.75% to 2.72%, and in Brazil, it went from 9.76% to 6.47% in October. Furthermore, inflation is also found to be decelerating in Indonesia and Spain, though slowly.

Outlook 

We expect inflation to remain elevated in the coming months. The lagged effect of flood and exchange rate passthrough effect on domestic prices will continue to drive inflationary surge in the coming months. However, the rate of spike in inflation may moderate as global commodity prices continue to taper. As we wait for MPC meeting next week, we expect the CBN to maintain its restrictive monetary policy. However, the pace of interest rate hike is expected to taper.