Inflation Reversal to 15.94% in December; Is it a Trend or a Blip?


Thursday, January 11, 2018 04:12PM / FDC 

We forecast that headline inflation will creep up to 15.94% in December 2017, from 15.90% in November. This will be the first increase after 10 months of consecutive marginal declines (cumulatively 1.88%). Our forecast is based on a simple regression model and empirical analysis. We also expect core inflation year-on -year to increase in the review period to 12.43% from 12.20% in November. However, food inflation year-on -year is estimated to maintain its downward trend to 20.26%.

The anticipated change in inflation comes as no surprise due to the peculiarities of the month. Typically, December is characterized by higher spending as a result of festivities. December 2017 also witnessed the reoccurrence of fuel queues, last experienced in 2016.

Driving Factors of Upward Trend

Supply shocks
The fuel crisis which started in December 2017 deteriorated further undermining Christmas celebrations. The shortage in the supply of PMS led to a sharp increase in the unofficial pump price from N145/ltr to as high as N250/ltr in filing stations and in excess of N400/ltr at the black market. The immediate impact was felt on domestic transport fares, which increased by over 100%. Other sectors of the economy, with no link to petrol, also exploited the uptick in transport costs. This crisis exposes the ineffectiveness of price controls in emerging markets such as Nigeria. The DPR and NNPC’s efforts to enforce the pump price at N145/ltr proved abortive. 

Seasonality effects
Traditionally, there is increased consumer spending in December associated with the Christmas season. Festive-sensitive goods such as rice, chicken, turkey and vegetable oil, recorded price increases. Non food commodities also recorded price increases such as air and road transports.  

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If our estimates are accurate, month-on-month inflation will increase by 31bps to 1.09% (13.89% annualized). The uptick will be consistent with the increased liquidity in the system due to the surge in the average opening position of banks by 1,729% to N253.12bn long from N13.84bn long. However, a spike in bank liquidity does not mean an increased money supply as broad money (M2) contracted by 5.54% (annualized) in October to N22.5trn. 

Core sub-index to increase
Core inflation (inflation less seasonality) is expected to rise by 23bps to 12.43% from 12.20% year-on-year in December. Similarly, month-on-month core inflation is likely to increase to 0.84% (10.56% annualized) from 0.77% (9.64% annualized). The slight increase in the core index is driven by supply shocks. 

Food sub-index to taper
Food index is likely to decline to 20.24% year-on-year in December from 20.30%. Conversely, month-on-month food inflation is projected to increase to 1.31% (16.97% annualized) from 0.84% (10.58% annualized). The marginal decline in food index year- on year can be attributed to base year effect, while the month-on-month rise in the food index is driven by seasonality and supply shocks. 

Sub-Saharan Africa
With the exception of Ghana, most countries in SSA recorded a decline in headline inflation in December. The decline was driven mainly by a drop in the prices of food, non-alcoholic beverages and clothing & footwear. However, housing and transport costs remain key concerns for most of SSA due to the increase in global crude oil prices and ultimately refined petroleum products. This continues to adversely affect logistics and utility costs in these countries.

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Concluding thoughts
In spite of the projected uptick in inflation, we expect the MPC to adopt a more accommodative stance in 2018. This could be in form of tinkering with either the CRR or MPR.  

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