The latest jump in Nigerian inflation, to 16.5% y/y in January, on the back of surging food price pressures, is likely to increase pressure on the central bank (CBN) to tighten monetary policy. But as concerns about the weakness of the economic recovery take centre stage, we think that the CBN will hold fire.
Inflation rises again, but CBN in no mood to tighten policy
- The latest jump in Nigerian inflation, to 16.5% y/y in January, on the back of surging food price pressures, is likely to increase pressure on the central bank (CBN) to tighten monetary policy. But as concerns about the weakness of the economic recovery take centre stage, we think that the CBN will hold fire.
- Figures released today showed that inflation in Nigeria jumped from 15.8% y/y in December to 16.5% y/y in January, the highest since early 2017. (See Chart 1.) The outturn was above our estimate of 16.0% y/y as well as the Bloomberg consensus of 16.1% y/y.
- The surge in food price pressures continued unabated. Food inflation jumped from 19.6% y/y December to 20.6% y/y in January, pushing up the headline rate by 0.6%-pts. Ongoing security problems that prompted a major reshuffle in top armed forces circles have continued to disrupt the food supply chain. And a weaker naira, alongside FX restrictions, appear to have added to imported food price pressures.
- Inflation rose in nearly all of the major price categories. (See Table 1.) Following moves to liberalise energy prices, the recovery in global oil prices is feeding through to transport inflation, which reached 13.5% y/y in January. Core inflation rose from 11.4% y/y in December to 11.9% y/y in January, a three-year high.
- We think that inflation is probably close to a peak but it will probably take until the second half of the year before the headline rate drops back markedly. Food price pressures are likely to take some time to ease. Currency weakness and FX restrictions will continue to put upward pressure on inflation of imported goods. And the rebound in global oil prices will keep transport inflation elevated.
- Rising inflation may put pressure on the central bank to tighten monetary policy, but we doubt that policymakers will respond. In the most recent January MPC meeting, there seemed to be a degree of optimism that inflation will drop back as pandemic-induced disruptions subside. In fact, once the headline rate eases, we think that the recent shift in policymakers’ focus to support the economy will turn into action. We’ve pencilled in 150bp of rate cuts in the second half of 2021.
Chart 1: Consumer Prices & Key Policy Rate
Sources: Nigerian Bureau of Statistics, Central Bank of Nigeria, Capital Economics
Table 1: Nigeria Consumer Prices
Sources: Nigerian Bureau of Statistics. (*) Includes non-alcoholic beverages
Virág Fórizs, Africa Economist, email@example.com