Inflation rose from 11.1% y/y in July to 11.2% y/y in August, in line with Vetiva estimate but ahead of Consensus expectation of 11.1% y/y. Meanwhile, month-on-month (m/m) inflation moderated slightly—from 1.1% to 1.0%, indicating that the rise in headline inflation was as a result of a lower August 2017 base. Across the sub-indices, Core inflation registered at 10.0% y/y (July: 10.2% y/y) and 0.8% m/m (July: 0.8% m/m) whilst Food inflation remained flat at 1.4% m/m but rose from 12.8% y/y in July to 13.2% y/y in August, the first increase since November 2017, showing the effect of persistent food price pressure in recent months.
Domestic and imported food price pressure apparent
Notably, the average m/m food inflation in the first four months of the year was just 0.9% but has been 1.4% in the second four months of the year. We are undoubtedly beginning to feel the effect of disruptions to domestic food production as a result of the conflict in the Middle Belt and we expect this pressure on food prices (and supply) to outlast the harvest season.
Nevertheless, imported food also weighed on August numbers, registering at 15.7% y/y and 1.8% m/m, which is the highest monthly inflation figure in the post-devaluation era (after June 2016). This is despite the FAO index remaining flat m/m and amid little movement in the exchange rate (average NAFEX rates | June: ₦361.11/$1, July: ₦361.50/$1, August: ₦362.16/$1).
Inflation to trend as expected further rises in the offing
Inflation is progressing as we expected, and we see further rises in the coming months, on the back of persistent food price pressure, fiscal injections, and waning base effects. This is in line with the thoughts of the Monetary Policy Committee (MPC) members, with Adeola Adenikinju explaining, “There is a genuine anxiety about liquidity surfeit in a pre-election year, with anticipated high election spending, as political parties fail to keep to election spending guidelines, late passage of the 2018 appropriation bill, the supplementary bill submitted to the National Assembly…” in his July MPC statements.
We maintain our forecasts for September (11.6% y/y) and 2018 average (12.2% y/y) as inflation continues to trend in line with our expectations. Furthermore, we do not expect the MPC to be more angsty over August inflation as the committee has long-since anticipated a rebound in inflation i.e. at recent meetings, the inflation expectations of the MPC have been higher than actual inflation, yet we have not seen a rate hike.