Headline Inflation touches a 4-year low, moderates to 11.08% y/y (Data Reaction and Outlook)

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Earlier, the National Bureau of Statistics (NBS) published Nigeria’s inflation report for Jul-19, showing headline inflation rate moderated for the second consecutive month to its lowest point since Jan-16, down 14bps to 11.08% y/y.

Similarly, month-on-month (m/m) headline inflation rate inched lower to 1.01% m/m (vs Jun-19: 1.07% m/m). Further analysis showed that the performance was driven by y/y and m/m declines in the food and core Inflation subindices. Notably, the rate of acceleration in the food inflation slowed, as the sub-index shed 17bps to 13.39%y/y and 6bps to 1.01% m/m respectively. This was complemented by a marginal decline in the core inflation sub-index (down 4bps to 8.80%y/y and 8bps m/m to 0.77%).

Similar to the performance of Jun-19, the downward pressure on the headline inflation subindex continued to be supported by lower growth rates in its heavily weighted components, such as, Food & alcoholic beverages (down 0.17% to 13.33% y/y) & Alcoholic Beverage, Tobacco and Kola (down 0.12% to 10.16% y/y). Additionally, the marginal reduction in core inflation was partly due to stability in the PMS price, clearly seen in the moderation of Housing Water, Electricity, Gas and Another Fuel component (down 5bps to 7.08% y/y). The impact of the Central Bank of Nigeria’s continued FX intervention, which created stability of the foreign exchange rate, also tempered core inflation, in our view.

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Inflation Outlook

Looking into Aug-19, we expect m/m and y/y headline inflation to remain sticky at the 1.0% and 11.0% regions respectively. Specifically, we have factored in 101bps increment in the m/m inflation sub-index and expect the headline inflation to settle at 11.04%. On the downside, a consideration of recent events suggests we could see a bit of pressure on the Food Inflation Index. Beyond the festivity, the persistence of flooding, conflicts and banditry in the northwest and central parts of Nigeria are issues that could distract the growing season. On the other hand, the core inflation sub-index that had been partly kept in check by the hinged PMS prices and the relatively stable exchange rate should remain under control.

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Despite recent pressure on oil prices and 49bps MTD depreciation of the Naira at the I&E
Window, we expect the CBN to continue to provide anchorage for the currency through
interventions at the FX Window. For the rest of the year, barring the materialization of
adjustment in energy prices and aggressive implementation of the minimum wage, we
estimate headline inflation to be sticky between 11.0% and 11.5%, averaging 11.4% in H2-19, which would be 80bps below the average inflation rate in 2018.

 

United Capital Research

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