July 2018 Inflation: Softer global food prices guide inflation lower in July

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How Consumers View Inflation
How Consumers View Inflation

Nigeria’s July 2018 annual inflation came in at 11.1% y/y, in line with Vetiva and Consensus forecasts, and marginally lower than the 11.2% y/y recorded in the preceding month. Inflation also declined month-on-month (m/m) from 1.2% to 1.1%. This trend was apparent across both food and core sub-indices as Food Inflation moderated from 13.0% y/y to 12.8% y/y and 1.6% m/m to 1.4% m/m whilst Core Inflation moderated from 10.4% y/y to 10.2% y/y and 1.0% m/m to 0.8% m/m.

Energy price easing assists core inflation

The decline in m/m Core Inflation was the first in seven months and took it to its lowest level since February. This was partly driven by moderating energy prices as average prices of premium motor spirit (PMS), automotive gas oil (diesel), household kerosene (HHK), and liquefied petroleum gas (LPO) declined in July.

Furthermore, prices of all petroleum products are much lower than start-of-year levels, with PMS recording the largest decline (15%) even as it remains above the ₦145/litre regulatory price ceiling.

Within the core sub-index, Clothing & Footwear recorded the most significant decline; from 11.0% y/y to 10.6% y/y and 0.9% m/m to 0.8% m/m. Although we note that non-food price pressure has been abating, it remains high. Underlying consumer prices (excl. food and energy) rose 0.8% m/m in July, annualized to 10%—still higher than the Central Bank of Nigeria upper limit of 9% and 2014 (8.1%) and 2015 (9.0%) averages. With electioneering kicking off in August (start of party primary season), we anticipate even more pressure on underlying consumer prices moving forward.

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.

Food inflation moderates, but domestic prices little changed

The drop in food inflation is a significant positive as it has long since been the problem child. However, most of the moderation was likely driven by a substantial decline in Imported Food Inflation from 1.2% m/m to 0.7% m/m (albeit only marginally down y/y—15.7% to 15.2%). This marks the lowest m/m Imported Food Inflation since October 2015 and comes on the back of a 4% m/m decline in the FAO Food Price Index.

Although it is difficult to determine the precise contribution of imported food to overall moderation in food inflation, the sizable drop in imported food price
pressure and relative stickiness of overall food prices suggests that domestic food price growth was mostly unchanged. This is relevant as most of the recent (and anticipated) pressure stems from domestic prices as a result of the violence in the Middle Belt of Nigeria.

Anticipating sticky inflation

Whilst we cheer another drop in inflation—and the first m/m drop since February—we highlight that improvement was spurred by imported food and energy prices. Thus, the major dynamics of near-term inflation, most notably in the form of food production in the Middle Belt and election spending, remain largely unchanged. Amid this, we anticipate sticky m/m inflation in the near-term and expect price pressure to rise at year-end due to election spending. Putting all of this together, our outlook is unchanged. We forecast a slight uptick in August to 11.2% due to a higher base and project average inflation for 2018 at 12.4%.