Headline Inflation to Dip Again To 15.88% in November


Tuesday, December 12, 2017 / 6:59PM /FDC 

We forecast that headline inflation will decline for the 10th consecutive month to 15.88%. We believe that this will be the lowest rate of inflation in 2017 as inflation flattens out. However, month-on-month inflation is expected to marginally increase to 0.77% (9.60% annualized) from 0.76% (9.54% annualized) in October.

This decline in headline inflation is mainly driven by waning base year effects and the decrease in global commodity food prices such as wheat flour and sugar. A stable exchange rate over the last 2 months has seen the naira strengthen to N363/$, encouraging producers to finally pass through the benefit of cheaper imports to consumers.

In addition, manufacturers have reduced production levels in anticipation of the decline in demand in January 2018, evident in the sharp drop in FBN’s PMI for November to 60.1 from 64.8 in October. This tapered inflationary pressures during the month.

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Core sub-index up again
We expect core inflation, which is inflation less seasonality, to inch up for the second consecutive month to 12.18% from 12.14% in October. This is partly due to the challenges in logistics. Diesel prices remain high though prices eased to N200/litre from N205/litre in October. The volatility in the supply of diesel has made diesel prices sticky downwards. 

Food sub-index to reap from abundant output
Food index is likely to taper to 20.26% from 20.31% in October, with month-on-month food inflation also declining to 0.84% (10.58% annualized) from 0.85% (10.63% annualized). This is mainly driven by significant government interventions in the agriculture sector, such as the Commercial Agriculture credit scheme (CACS), which has so far released over N500bn to boost economic activities in the sector. 

Sub-Sahara Africa
With the exception of Angola, most countries in SSA recorded a decline in headline inflation even with a cut in interest rates during the year. This decline in price level was driven mainly by the improvements in domestic food yields and a decrease in global commodity food prices. Transport and maintenance costs remain key concerns for most of SSA owing to the increase in prices of crude oil and refined petroleum products. This has negatively impacted both logistics and utilities costs in these countries. 

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Generally, prices tend to spike during the festive period as a result of rising demand for goods and services. However, tepid recovery from the recession and the fragility of the economy will affect consumer expectations and demand. Hence, we expect a flattening out in inflation numbers for December. Year to date, (January- October), inflation in Nigeria has averaged 16.73%. 

The CBN’s move to reduce the cash reserve requirement (CRR) for SME-focused banks is an indication that a reduction in interest rates is imminent. This is positive for lending activities of banks to SMEs. The availability of additional funds in the SME segment will boost manufacturing and output.

We expect the government’s intervention programmes, pre-election spending and a possible wage review to exert inflationary pressures on headline inflation in the first quarter of 2018. This is due to the fact that the impact of the increase in demand will be matched with transitory output and not an increase in productivity.


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