January Inflation Review – Inflation Begins 2018 Descent With 15.1% Y/Y Print

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Registering at 15.1% y/y, January inflation came in line with Vetiva and Consensus expectations, also showing a moderation from 15.4% recorded in December 2017 as high base effects kicked in. Notably, Food Inflation declined from 19.4% y/y in December 2017 to 18.9% y/y in January 2018, though Core Inflation remained flat at 12.1% y/y.

Inflationary pressure picked up slightly at the start of the year as monthly (m/m) inflation rose from 0.6% in December 2017 to 0.8% in January 2018, with both Food (0.6% to 0.9%) and Core (0.5% to 0.7%) inflation accelerating on a month-on-month basis. We partly attribute this uptick to a steady increase in energy prices across the country, particularly premium motor spirit (PMS), which rose 11% from December 2017 levels.

Food inflation continued its downward trend – peak of 20.3% y/y in September 2017 to 18.9% y/y in January. Notably, there has been contained the impact of the 2017 Benue floods and the scourge of Herdsmen attack in major food-producing regions as domestic food price pressures remain relatively mild. The story is slightly different with Imported Food inflation which rose for the sixth straight month to 16.2% y/y. Declining steadily from its peak of 21.1% y/y in November 2016 to a recent low of 14.1% y/y in July 2017, Imported Food inflation has accelerated – now rising to 16.2% at the start of 2018. This is at odds with currency stability in recent times and moderating global food prices, seen in the 5% decline in the FAO food price index between July 2017 and January 2018.

Inflation is calculated by looking at corresponding numbers of the Consumer Price Index (CPI). The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services over time, relative to a base year. The current base year for the Nigerian CPI is 2009. Annual inflation for a month is computed by comparing the percentage change in the CPI figure for that month in the two comparison years.

PMS market likely to remain tight

At a national average of ₦191 (December national average of ₦172), PMS prices are 32% above the regulated pump price of ₦145. This increase can be attributed to higher oil prices in recent months (January Brent crude average: $69/bbl vs. $64/bbl in December) which has kept landing cost of PMS above ₦145. As a result, the Nigerian National Petroleum Corporation remains the primary importer of PMS into the country and product supply and pricing have depended on the corporation’s ability to distribute products and the Petroleum Product Pricing Regulatory Agency’s diligence in monitoring PMS retail prices. We further note that data from the Ministry of Petroleum Resources show larger PMS volumes trucked out in January – 50 million litres vs. 37 million litres in December – in response to petrol shortages across the country. Despite this, realized pump prices are likely to remain high, especially with likely product smuggling to exploit higher prices in neighboring countries.

Stripping out food and energy prices, inflation is sticky at 12.7% y/y (6-month average: 12.7%) with m/m inflation hovering around 0.8% during that period. This stickiness in underlying inflation suggests that base effects have dwindled here and gives a clearer picture of what inflation looks like in the country (outside more volatile food and energy prices). The respective levels of y/y and m/m inflation show that some inflationary pressure remains and may dissuade the Monetary Policy Committee from enacting an aggressive cut in the monetary policy rate until we see a material change in underlying inflation in the coming months.

Nigeria looks to emulate Ghanaian inflation trend

Nigeria’s inflation is on a downward trend but the pace is unimpressive compared to continental peers. January inflation of 15.1% y/y compares to 11.8% y/y, 23.7% y/y, and 17.1% y/y in Ghana, Angola, and Egypt respectively. Furthermore, Ghana’s inflation declined from 18.4% y/y in June 2016 to 11.8% y/y at the end of 2017; during that time, Nigeria’s inflation declined from 16.5% y/y to 15.4% y/y. Similarly, Egypt’s inflation has declined from 33.0% to 17.1% in just six months as prior inflation was mainly driven by currency devaluation and the removal of subsidies. Of all these countries, only Ghana currently operates a dovish monetary policy regime, with Angola raising interest rates by 200bps as recently as November 2017.

Outlook little changed, 14.7% expected in February

Base effects from the first half of 2017 will be extremely important in determining headline inflation in H1’18, particularly on food prices (H1’17 average m/m inflation: 2.0%, H2’17 average: 1.0%). We expect the moderation in Nigeria’s headline inflation to persist as relative currency stability augment base effects. The key pressure point in the near-term remains energy prices, although the recent decline in global oil prices (Brent crude prices down nearly 10% so far this month) may offer some respite. Amid these, we forecast 14.7% inflation in February, bringing average annual inflation forecast for 2018 to 12.8%.

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