Another Sticky Movement in General Price Levels


Tuesday, October 17, 2017 4:18 PM /Cordros Capital


Headline Inflation Rate at 15.98% in September

Nigeria’s September headline inflation rate surprised slightly, beating our estimate by 22 bps. The National Bureau of Statistics (NBS) reported that the Consumer Price Index moderated for the eighth consecutive month to 15.98% y/y in September, a 3 bps soft touch below August’s 16.01%, and just 2 bps lower than Bloomberg-compiled median estimate of 16.00%.


It is safe to conclude (from the data) that the widely expected base effect driven moderation surrounding outlook for consumer prices at the beginning of the year has fully petered out. To be lucid, the headline index has moderated only 27 bps since dropping to 16.25% in May, compared to the considerable 130 bps posted between end-2016 and April this year.


Still positive, however, is the sustained month-on-month deceleration in the rate of increases in general price levels, for the fourth successive month, specifically at 0.78% (last recorded in November 2016), 19 bps lower than the 0.97% recorded in August. Noteworthy, m/m inflation rate, on average in Q3-17 (0.99%), was 3 bps lower than the average rate reported in the same period of 2016.   

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Useful insights can be drawn from the MPC’s considerations in its last meeting, wherein the decision to maintain status quo was supported by the need to achieve more clarity in the evolution of key macroeconomic indicators including budget implementation, economic recovery, exchange rate, inflation, and employment generation, specifically between now and the first quarter of 2018. Clearly, the sticky year-on-year inflation rate again supports the Committee’s case of holding the line on its policy stance.

However, it is tempting to expect a stronger case for a rate cut in the November meeting, considering (1) notable descent in the m/m rate of price increase, (2) potential bias towards inflation and growth expectation rather than both indicators themselves, and (3) continued drop in yields on government securities.


Notably, consistent with observed trend this year, all classification of Individual Consumption by Purpose (COICOP) which aggregates the headline index increased during the month under review, with sizable price increases reported in the following major divisions: potatoes, yams & other tubers, milk cheese & eggs, soft drinks, fish, bread & cereals, coffee tea & cocoa, meat oil & fats.


Food Index Pressure Picks Up

Food inflation increased at a faster rate of 20.32% y/y in September, after increasing at a slower rate (20.25%) in August, bringing year-to-date increase in the segment to 16.7% -- compared to 13.9% in the same period last year. The food inflationary pressure is consistent with a reported 16.12% y/y increase in the average prices reportedly paid by households across various rural and urban markets and informal arrangements, according to the NBS Selected Food Price Watch for the month.


On a m/m basis, however, food inflation extended the moderation it started in June, increasing by 0.87% (vs. 1.14% in August), partly supported by reported monthly declines in the average prices of tomato (-25.25%), yam tuber (-24.42%), beef (-6.33%), dried fish sardine (-3.29%), and sweet potato (-3.17%). Imported food inflation increased faster at 14.83% y/y (previously 14.42% y/y).


Core Inflation Resumes Slower Rate of Increase

In line with our guidance, the pause in the eight-month long moderation in core inflation rate was short-lived, as core prices rose at a slower rate both year-on-year (12.10%; August: 12.30%) and month-on-month (0.80%; August: 0.93%) in September. The highest increases were reported in clothing materials and articles of clothing, garments, passenger transport by air, motorcycles, shoes and other footwear, furniture and furnishing, solid fuel, and non-durable household goods.


The y/y slower rate of price increase in this segment can be attributed to a milder rise in housing water, electricity, gas and other fuels (HEGOF rose 8.80% y/y, compared to 9.15% y/y in August) while the m/m movement reflects monthly declines across household equipment maintenance (1.02% vs. 1.20%), health (0.68% vs. 0.95%), transport (0.79% vs. 0.85%), education (0.61% vs. 0.68%), clothing and footwear (0.97% vs. 1.16%), and restaurants & hotels (0.63% vs. 0.85%) segments – in addition to 0.45%, 3.98%, and 5.83% monthly moderations in average national prices of kerosene, liquefied petroleum gas, and diesel respectively.



Again, the direction of headline inflation for the rest of 2017 will be mostly driven by food prices. Discounting the risk of negative surprises, specifically with regards foreign exchange, and the possible increase in electricity tariff, we believe core inflation rate will remain relatively benign over October.


On food prices, we reiterate our position that staple harvests, which commenced this month, are likely to be more robust than last year’s, due to increased access to inputs as well as strong production incentives for farmers due to very high staple food prices, in addition to increased government funding and support. Our position is consistent with a recent report by FEWS NET which confirms that the main agricultural season is progressing favorably in most parts of the country, with many poor households consuming own food stocks and are facing minimal acute food insecurity.


While noting the incidence of flooding in certain parts of the country, including significant impacts in Benue, Kogi, Niger, Ebonyi, and Delta States, we think near-normal timing and cumulative rainfall across most other (localized) areas of the country (in line with earlier guidance for the rainy season through September/October for average to above-average cumulative precipitation) will also be supportive of a relatively healthy harvest.


In addition, despite still-high staple food prices in conflict-affected areas of Borno, Yobe, and Adamawa States, preliminary results of a joint WFP/FEWS NET market survey show that markets functioning in the areas are gradually improving.

On the balance, our model estimates the headline inflation rate to rise at a slower rate of 15.78% y/y and 0.66% m/m in the month of October.

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