The September 2019 Consumer Price Index (CPI) report published this week revealed a broad-based increase in consumer prices, partly caused by the recent partial closure in land borders between Nigeria and neighboring countries. This fed into headline inflation which rose sharply to 11.2% Y-o-Y in September (August: 11.0%), bucking the trend of disinflation between June and August 2019. Although the quick uptrend in headline inflation can be attributed to the 6bps M-o-M increase to 1.04% (August: 0.99%), the first increase in five months, we believe a weak base played a major part.
Unsurprisingly, food inflation advanced to 13.5% Y-o-Y in September (August: 13.2%) following a faster M-o-M upswing in the food index to 1.3% from 1.2% in August 2019. The increase in food inflation Y-o-Y and M-o-M was the first in four months and notably, this was in contrast to the deceleration usually observed following the onset of the harvest season. We suspect that the negative impact of the partial border closure on trade, which is mainly in food products, might have offset the reprieve provided by food harvests.
Meanwhile, imported food inflation remained sticky, rising to 15.9% Y-o-Y in September (August: 15.8%), the highest since May 2018. The downtrend in core inflation also halted for the first time since January 2019, with the core index rising to 8.9% Y-o-Y in September from 8.7% in August. This increase was driven by a sharp M-o-M rise in core inflation to 0.9% in September from 0.7% in August. With the exchange rate stable across market segments, we suspect that the adoption of the new exchange rate of N326 to USD$1.0 in the computation of import duties might have contributed to the increase in core inflation.
As we expected, the FG’s decision to shut land borders since August 22nd, 2019 weighed on consumer prices, especially food items. Informal cross-border trade conducted through land borders is sizeable, estimated at US$6.9bn by the CBN between mid-2013 and mid-2014. The share of food in informal cross-border trade was 75.7% within the same period, which we believe wouldn’t have changed significantly since. As the FG has recently ordered a full closure of the border, which effectively stops trade in illegal and legal goods, we expect a sustained negative impact on consumer prices in the following months. This would mask the reprieve usually provided to food prices from harvest in the last quarter of the year, especially as the festive season is upon us.
Our near-term outlook on inflation is negative, hence we revise our average monthly inflation forecast higher to 11.5% from 11.3% for 2019. In the short term, elevated food prices due to persistent insecurity in the middle-belt and the rest of Northern Nigeria, overdue adjustments to prices of electricity and petrol and the heightened risk of a currency devaluation are the many downside risks to inflation.