Base Effects Strike Down Inflation In February 2017


Tuesday, March 14, 2017 05:17 PM / ARM Research

In our January inflation report, we argued that base effects from the 45% increase in electricity tariff in February 2016 set a high hurdle for headline CPI to maintain its current run rate.

Click Here toDownload February 2017 CPI(PDF) Report  

Consequently, we concluded that inflation was set for its first decline in sixteen months.

This morning, the National Bureau of Statistics (NBS) reported that headline inflation shrank 94bps from its prior reading to 17.78% YoY over February 2017. On a MoM basis, headline inflation increased by 1.49% (48bps higher than the prior month’s reading).

Broadly, the moderation in inflation was a fall-out of high base effects from the chained CPI series which underpinned a sharp drop in core inflation and masked pressures on food inflation.

Figure 1: Trend in Headline, Core and Food Inflation



Source: NBS, ARM Research

Base effects hit core inflation hard:
Over February, the core index declined nearly 200bps to 16% YoY largely reflecting declines in HWEGF (-6.8pps), where electricity prices are domiciled.  In terms of key prices, Kerosene prices declined 18.8% MoM to N352.42/litre, while average Diesel (+3.7% MoM to N249.38/litre) and PMS prices (+0.4% MoM to N149.8/lite) were modestly higher.

Grain prices push food CPI to eight year highs:
Consistent with our views, the NBS linked pressures in Food CPI to higher domestic grain prices. As we noted in the last three CPI releases, higher cross border demand for Nigerian grains, a by-product of naira weakness, continued to drive domestic prices higher as domestic food supplies shrinks.

Going forward, we expect base effects from the 67% hike in fuel prices in 2016 to also come into view with greater prospects for further declines in headline CPI readings. Over 2017, we forecast average inflation at 14.4% YoY (2016: 15.6% YoY).

Figure 2:  CPI forecasts



Source:  ARM Research

In terms of market impact, having linked ongoing monetary tightening to the need to bring down inflation, the cutback in inflation makes next week’s monetary policy meeting interesting. While we think persisting concerns around the currency could yet delay a switch to a dovish monetary policy, the CBN could, as in 2016, elect to tweak with the marginal clearing rates at its OMO auctions while leaving MPR static.

Click Here toDownload February 2017 CPI(PDF) Report  

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