Afrinvest Weekly Update | Dec 2023 CPI Forecast - Surprise Intervention Move Tempers Inflation Expectation
An Extraction of the Afrinvest Weekly Economic & Market Report for January 12, 2024
Photo Credit: Google
This week, we present our December 2023 inflation projection ahead of the official release by the NBS on Monday. In the just concluded year, headline inflation rose from 21.8% y/y in January to 28.2% y/y in November largely due to the continued pressure on the food inflation sub-basket. Based on our model output, we estimate that the headline rate would accelerate to 29.0% y/y in December, driven by the combined impact of festivity-induced high demand, currency pressure, and the uptick in transportation costs due partly to increase in energy goods prices.
Based on our previous forecast, we had projected a 2.9% and 2.2% m/ m farm and non-farm inflation prints which should crystalise to a headline inflation of 29.3% y/y and an annualised average of 24.6%. However, our reassessment of the macroeconomic dynamics in December favours a less pessimistic case (29.0%, annualised average: 24.5%), given FG's unanticipated interventions - free train ride and a 50.0% discount on inter-state road transport fare during the peak of the yuletide. On the basis of the above, we estimate a softer m/m headline reading of 2.4% as against 2.5% in the earlier forecast. As per the food inflation sub-component, we estimate the yy reading to climb to 34.1% (from 32.8%), while the m/m reading should settle at 2.8%. For the core inflation sub-basket, we estimate a y/y reading of 21.3% and m/m print of 1.8% compared to 22.6% y/y and 1.6% m/m in the preceding month.
Looking ahead into 2024, we project a modest decline in the average headline inflation rate (beginning from Q2) to 22.1% in a blue-sky scenario. This, we believe, should be shaped by high base year impact, muted increase in energy prices, reduction in FX volatility, modest improvement in domestic food supply, and positive spillovers from decelerating global inflation trend. On the basis of this expectation, we hold that the CBN may guide the policy rate (MPR) higher in Q1 to 19.0% before relaxing its hawkish posture from H2 depending on the trajectory of other key macroeconomic parameters and the direction of interest rates in major economies.
Chart 1: Headline Inflation Edges Closer to 30%
