December 2020 CPI Report: Headline Inflation Shoots to 15.8%

The upward pressure on domestic consumer prices lingered for the 16th consecutive month as headline inflation rose to 15.8% year on year in December 2020 from 14.9% in November according to the recent data in the NBS’ Consumer Price Index report. This means average monthly inflation rate was 13.3% in 2020, above our revised estimate of 12.8% and an increase from 11.4% in 2019. This is the highest level of headline inflation since December 2017 and the largest increase (98 basis points) since January 2012. However, the m/m trend was muted as it hit a 43-month high of 1.6% from the same level in November.

On a related note, the food index rose 19.6% year on year in December, up 1.3% from 18.3% in November 2020. This is the biggest year on year increase in the food inflation since June 2016. However, there was a muted m/m increase (10 basis points) in the food index to 2.1% from 2.0% in the previous month. While the slow increase in the m/m food inflation coincides with the reopening of the land borders by the FG, we attribute the muted increase to the marginal drop in the prices of basic agricultural produce such as tomatoes and onions due to harvests.

Imported food inflation rose marginally by 1 basis point to 16.7% year on year similar trend with the m/m movement which was flat at 1.3%. Analysts at Afrinvest suspect that on-going FX scarcity within the system may have partly contributed to the muted increase in imported food inflation. Core inflation rose by 3bps to 11.4% year on year from 11.1% in November, the highest level since March 2018. This was driven by a faster month on month increase in the core index by 1.1% from 0.7% in November. The uptick recorded in core inflation reflects rising demand for non-food items during the festive season, the analysts said.

The trend in consumer prices during the month of December reflects continued weakness in the agriculture sector as the harvest season should normally drive reduction in food prices.

In the immediate term, Afrinvest foresee sustained pressure on consumer prices on the back of the extended weakness in the agriculture sector and the increase in electricity tariff, for which implementation has commenced in January 2021.

“Continued FX shortages and the lingering impact of the 2020 currency devaluation also contribute to this outlook. However, the land border reopening and the high base effect from 2020 is expected to put a lid on further increases in the price level.”