Afrinvest Weekly Update | Dec 2023 CPI - Soft Inflation Increase Buoys Expectation of a Tempered Price Level in January
An Extraction of the Afrinvest Weekly Economic & Market Report for January 19, 2024
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This week, we dissect the December 2023 CPI report published by the NBS, outlining the basis for our January inflation outlook alongside the implications of price trend on interest rate. From the report, headline inflation soared to a new record high of 28.9% y/y (forecast: 29.0%) and 2.3% m/m from 28.2% and 2.1% in the prior month. This brought the annual average inflation rate for 2023 to 24.5% (2022: 18.8%), a far cry from the 17.2% target set in the year's budget. The record high price level was due in part to continued pressure on the food basket due to lingering insecurity crises, weak mechanisation, and perennial logistic crises. Similarly, the halt to PMS subsidy payment (which drove average PMS price up 225.8% y/y to ₦671.86 in December) and currency depreciation (down 49.1% y/y to ₦907.11/$) contributed to upticks in price level.
Specifically, the jump in December CPI was driven by both food and core baskets. Food inflation rose for the 12th consecutive month by 109bps to 33.9% y/y with a monthly increase of 30bps to 2.7%. This put annual food inflation at 27.8% against 20.5% in 2022. Also, the core inflation sub-component rose 68bps to 23.1% y/y, 29bps m/m to 1.8% and annual average stood at 20.7% from 13.7%. This reflects the pass-through effect of higher energy prices and weaker exchange rates on transportation costs and services.
In view of the lingering upsets to price level, we expect inflation to remain elevated through 2024 though at a slower pace. In a blue-sky scenario, we estimate that average headline inflation rate would decline to 22.1%. This is hinged on high base year effect of, muted increase in energy prices (as current prices suggest modest under-recovery payment), reduced FX volatility relative to 2023, and positive spillovers from decelerating global inflation trend. Particularly in January, we estimate y/y headline inflation to edge lower by 40bps to 28.5% on the back of muted increase in the m/m food and core indices and high base year effect.
Relatedly, the new CBN administration has published it's schedule of monetary policy meetings for 2024, with the first in the series coming up on February 26 and 27. Given the sustained surge in price level since the last MPC meeting in July 2023 which largely defy the CBN's goal, we hold that the benchmark policy rate (MPR) might be further hiked by at least 25bps to 19.0% in the Q1 before considering a dovish tilt in the second half, contingent on the trajectory of other key macroeconomic parameters and the direction of interest rates in major economies. In addition, we see the CBN maintaining a tight grip on liquidity level in H1, employing the instrument of OMO bills and excess CRR debit to support disinflationary target.
Chart 1: 1-year Inflation Rate Trajectory
