Inflation moderates slightly, but floods may drive rebound


Nigeria’s inflation declined for the eighth consecutive month this year, dipping to 16.0% y/y in August (July: 16.1%), in line with both Vetiva and Consensus estimates. The modest decline came on the back of persistent base effects – from high 2016 inflation – and a first sub-1.0% m/m inflation reading in August – 0.97% m/m to be precise, compared to 1.21% in July and YTD average of 1.43%.

Across the major sub-indices, Annual Food Inflation dipped 33bps in august, holding at 20.3% y/y, following a decline in m/m Food Inflation from 1.52% to 1.14%. Meanwhile, the Core sub-index also rose at a slower pace m/m, registering at 0.93% vs. 1.00% in July but was unable to prevent a rise in y/y Core Inflation from 12.2% to 12.3%, as a result of a weaker August 2016 base.

Benue flooding to pressure food prices

Despite the welcome slowdown in the rise in food prices, they remain very high, and this month’s increase was primarily driven by stronger price increases across bread & cereals, meat, fish, and oils & fats. In addition, Imported Inflation rose for the first time in nine months, despite relative currency stability and weakening global food prices, as measured by the FAO food price index. Imported Food inflation rose from 14.1% y/y in July to 14.4% y/y in August.

Meanwhile, looking at the month’s food price data, there looks to be no registered impact of the recent flooding in the Benue region which decimated substantial swathes of arable land and food storage facilities in the state. Notably, Food Inflation was comparably weak in Benue – 16.9% y/y and 0.6% m/m vs. 20.3% y/y and 1.1% m/m nationwide. We however anticipate a lagged impact and expect significant pressure on food prices in coming months, similar to that experience in the final quarter of 2012 when severe flooding lead to an acceleration in food inflation.

Using an international comparison, we note that inflation in the United States rose from 1.7% in July to 1.9% in August following severe tropical weather at the tail-end of the month. Whilst the price increases were largely driven by higher gasoline prices and sporadic price gouging, food prices are expected to react in the near-term, especially as Florida, one of the affected states, is the second-largest produce-grower in the country. For Nigeria, we expect the floods to further push up food prices, especially as existing import restrictions and prior currency devaluation discourage food importation to cover the shortfall.

Energy prices buoy core index

This month’s increase in the core index largely stemmed from higher prices across clothing & footwear and household furnishing & maintenance. And whilst education inflation declined in both y/y and m/m terms, we foresee a reversal in September given the start of the new school year that usually comes with higher school fees.

Despite this, as well as the marginal rise in y/y Core Inflation, the trend is markedly positive: none of the core sub-indices accelerated in m/m terms in August. Energy prices in particular continue to be a boon for consumers. The average national Household Kerosene (HHK) price declined 20% in August to ₦225.52/litre, nearly half of January 2017 price of ₦433.84/litre, following consistent intervention by the Nigerian National Petroleum Corporation (NNPC) to maintain adequate product supply and improved FX.

Similarly, the average national Premium Motor Spirit (PMS) price moderated for the third successive months, and at ₦144.43/litre, lies below the regulated upper pricing bound of ₦145.00/litre. Going further, PMS prices are likely to remain soft in the coming months, amidst reports that the NNPC has significantly increased its stockpile of the product. Despite this, we note that persistently strong global crude oil prices may pressure the landing cost of petrol in the country.

Food basket will continue to generate pricing pressures

Whilst we expect Core Inflation to moderate further, we do not see this outweighing the likely pressure on food prices in the coming months, at least until the respite of the peak harvest season. We have adjusted our model to account for this, and increase our September inflation forecast to 16.1% y/y (previous: 16.0% y/y). And although we have marginally increased our estimates for Q4’17 inflation, our 2017 average inflation forecast remains at 16.6% (2016: 15.6%).

In light of recent yield declines in fixed income market, this bearish inflation outlook may prove a snag to MPC easing intention at upcoming meeting.