Why December 2023 inflation was forecast at 29% —Report

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, an investment banking and advisory firm, Afrinvest (West) Africa Limited estimated that Nigeria’s headline inflation rate ( due to be released today Monday) would accelerate to 29.0 percent year on year (y/y) in December 2023.

Ahead of the official release by the National Bureau of Statistics (NBS) on Monday January 15, Afrinvest had, based on its previous forecast, projected a 2.9percent and 2.2percent month on month (m/m) farm and non-farm inflation prints which should crystalise to a headline inflation of 29.3percent y/y and an annualised average of 24.6percent.

In the just concluded year, headline inflation rose from 21.8percent y/y in January to 28.2%lpercent y/y in November largely due to the continued pressure on the food inflation sub-basket.

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 50.0percentv 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 2.4percent as against 2.5percent in the earlier forecast. As per the food inflation sub-component, we estimate the y/y reading to climb to 34.1percent (from 32.8%), while the m/m reading should settle at 2.8percent,” Afrinvest stated in its weekly report made available to Nigerian Tribune.

For the core inflation sub-basket, the firm estimate a y/y reading of 21.3percent and m/m print of 1.8percent compared to 22.6%lpercent y/y and 1.6percent m/m in the preceding month.

Looking ahead into 2024, the firm projects a modest decline in the average headline inflation rate (beginning from Q2) to 22.1percebt 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 19.0percent 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,” the Afrinvest Weekly Market Report observed.

It further explained that geopolitical tension in the Middle East heightened after the UK and the US launched an attack on Houthi positions in Yemen after exodus of commercial ship attacks in the Red Sea. This has resulted in diversion of shipping routes and longer delivery time of oil supplies and other commodities.

While the full-blown impact is yet to crystallize, the report noted that it has spiked increases in crude oil and other commodities prices.

In addition, US December inflation data published last week showed signs of an uptrend at 3.4percent from 3.1percent previously, thus clouding hope of rate cut by the Fed.

Nevertheless, global equities market proxied by the MSCI World Index posted a weekly gain of 1.4 percent.