Headline Inflation to Slide Marginally to 16.03% In August 2017


Thursday, August 31, 2017 2:30PM / FDC

We forecast that headline inflation will decline slightly for the seventh consecutive month to 16.03%, as base year effects wear out. Month-on-month inflation is also expected to slide to 0.99% (12.55% annualized) from 1.21% (15.57% annualized) in July. We believe that this decline would support the sense of cautious optimism about the economy, invigorate policy maker enthusiasm and push up investor confidence in the markets.

Core Inflation to continue its downward trend

We expect core inflation to marginally fall partly due to the stable exchange rate and the reduction in inventory cycles by manufacturers to reduce carrying costs. Manufacturers and retailers are already stocking up for a hectic December Christmas season.

Food Prices are harvest sensitive

Food prices are likely to remain sticky downwards with some minor exceptions in processed goods and commodities such as rice and palm oil. The harvest season is anticipated to commence in the month under review. However there will be a lag between when the harvest season begins and when the impact of increased supply would manifest. Commodity prices may begin to ease towards the start of Q4’17 because of the extended rainy season.

Import substitution impact sluggish

The import substitution drive of the government supported by the relative stability in the foreign exchange market is expected to reduce import cost. However, the full impact might be delayed keeping imported inflation flat in the month of August. This is because importers have been slow to reluctant in passing through the benefits of cheaper imports to the market.

Demand Pull Effect Minimal due to Tight Liquidity

The average opening position of the interbank market in August was N106.33bn short in response to massive interventions and OMO auctions by the CBN. This resulted in a contraction in money supply and higher interest rates especially at the short end of the curve. As a positive correlation exists between money supply and inflation, the illiquidity in the market serves to corroborate the anticipated decline in the pace of inflation.


There is some skepticism about the ability of the government to support the current foreign exchange policy. This is partly because of the cap on Nigeria’s crude oil output at 1.8mbpd, as well as speculations of Nigeria being included in the output cuts at the September 22nd meeting in Vienna.

The MPC is scheduled to meet on September 25/26 and it is widely expected that the committee will maintain the status quo again, albeit the decision might not be unanimous. However, we do not believe the decision to maintain status quo is likely to have any impact on the general level of interest rates in the market. This is because the MPC decision has been factored into market expectations.

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