Annual Inflation Flat Despite Hefty Monthly Decline


Tuesday, October 17, 2017 3:58 PM /Vetiva Research

Amidst a slightly weaker base from September 2016, September inflation came in flat at 16.0% year-on-year (y/y) – Vetiva: 16.1% y/y, Consensus: 16.0% y/y – despite the Consumer Price Index (CPI) recording the lowest month-on-month (m/m) increase since November 2016. Headline m/m inflation moderated from 1.0% in August to 0.8% in September, assisted by weaker food price pressure during the month.

Specifically, m/m Food inflation registered below 1% (0.9%) for the first time in 2017, but weaker base effects from prior year kept Food Inflation sticky at 20.3% y/y. In line with 2017 trend, non-food prices fared better in September as Core Inflation moderated in both y/y (12.3% to 12.1%) and m/m (0.9% to 0.8%) terms.

Where is food price pressure coming from?
Although food prices in Nigeria rose for the 28th consecutive month, markedly lower m/m inflation in September comes as a mild surprise considering the severe flooding that impacted Benue State and surrounding environs at the end of August. We had expected the resulting disruption to agricultural output and transport activities in that region to weigh on the food basket. 

Instead, food prices actually fell 0.6% on a monthly basis and food inflation moderated significantly from 16.9% y/y to 13.9% y/y in Benue State. Whilst it is too soon to draw conclusions, especially as we anticipate a lagged effect of the weather disruption, flooding seems to have had a negligible aggregate impact on food supply in the interim.

Imported Food Inflation has quietly inched up for the third straight month – 14.4% y/y in August to 14.8% y/y in September – and looking closely at the data, inflationary pressures here have been rather stable. Average m/m imported food inflation has hovered around 1.25% in each quarter of 2017, despite marked improvements in foreign exchange market liquidity and recent appreciation of the naira at the flexible market segments. From the end of May to the end of September, the naira appreciated 5% and 6% in the respective parallel and “Investors & Exporters” windows. Without showing a clear pattern, global food prices have trended higher so far this year – September FAO Food Price Index 4.4% higher y/y – which gives partial clarity on the persistence of imported food inflation.

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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.

Core Inflation offers cautious signs of promise
The decline in the core sub-index can be mainly attributed to waning pricing pressures across clothing, household furnishing, health, and transport. Despite this broad-based decline, underlying m/m inflation (excl. food and energy prices) tracked slightly above the headline number (0.82% vs. 0.78%) for a consecutive month, pointing to stubborn inflationary pressure beyond volatile food and energy prices. 

In the energy space, Household Kerosene (HHK) prices rose sharply from
226 to 264 in September but still remained well off 2017 average of 304. We note that the Ministry of Petroleum Resources reported its lowest Dual-Purpose Kerosene (DPK) daily truckout for the year (1.32 million litres) in September, down from 1.91 million litres in August, which may have contributed to this price uptick. 

In contrast, Premium Motor Spirit (PMS) prices held steady just below the
145 upper bound of the pricing band for yet another month as supply from the Nigerian National Petroleum Corporation (NNPC) continued to satiate the market. 

Finally, diesel and LPFO prices dipped 6% and 3% respectively in September. Looking at data from the Ministry, PMS and diesel loadings also dipped to their lowest values in 2017 last month, which could precipitate a tighter market in the near-term. Nonetheless, we expect strategic NNPC interventions to ensure product supply and stabilize market prices for the rest of the year.


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Lower base effects to colour Q4 inflation
There are promising signs that inflationary pressures are abating, particularly on food prices. Meanwhile, pass-through from global food prices should be tempered by currency stability. We anticipate m/m inflation to moderate further in Q4’17, though this would be met by a weaker base from Q4’16 (average m/m inflation: 0.9%), making headline annual inflation sticky. 

Nonetheless, amidst easing food prices and the impending harvest season, we are cautiously optimistic and lower our inflation forecast for the rest of the year – we estimate 15.8% y/y inflation for October and 2017 average annual inflation of 16.5% (previous: 16.6%).


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