Inflationary Pressure Largely Reflected Sharp Depreciation of the Naira


Wednesday, February 15, 2017 5.55 PM / ARM Research

Earlier in the day, the National Bureau of Statistics (NBS) reported that inflation printed 17bps higher from prior reading to 18.7% YoY over January 2017 – with MoM reading at 1.0% (vs. 1.1% in prior month’s reading). Over the period, inflationary pressure largely reflected sharp depreciation of the naira, which we reckon made this year’s Valentine the most expensive in eleven years using the headline inflation reading as a proxy. Sifting through the sub-components reveals that sustained rise in food prices was the driver of inflationary pressures as core reading subsided over the period.

Food prices surge to eight-year peak: Extending the pattern in recent months, food inflation climbed 42bps from prior reading to an eight-year peak of 17.82%. The upsurge in food prices continues to reflect higher cross border grain purchase as steep depreciation of the naira makes Nigerian produce more competitive. The NBS noted that food price pressures stemmed from higher cereal prices which jumped 132% over 2016. Furthermore, with the conclusion of main harvest season in Southern Nigeria in December, we believe thinning market supplies applied upward pressure on food prices.

Figure 1: Movement in Cereal prices and parallel market exchange rate

Description: cid:image006.png@01D287A1.3D822730

 Source: FEWSNET, CBN, ARM Research


·         Core inflation softens despite higher energy prices: In contrast to food, core inflation fell 19bps from prior reading to 17.85% largely reflecting slower rise, relative to prior month, in Education (-58bps) Restaurants and Hotels (-56bps) as well as Health (-31bps) divisions. Though energy prices rose sharply over the month (Kerosene: +87.1% MoM to N433.84/litre, Diesel: +22.6% MoM to N240.52/litre and PMS: +1.4% MoM to N148.7/lite), reflecting FX supply challenges, its impact on the Housing, Water, Electricity, Gas and other fuels division was offset by waning effect of the electricity price hike implemented in February 2016.

Figure 2: Trend in Inflation

Description: cid:image007.png@01D287A1.3D822730
Source: NBS, ARM Research


Going forward, we expect impact of electricity price adjustment to completely wane in coming reading with attention now shifting to our expectation for sharp inflation moderation owing to high base effect from 2016. Notably, we see limited scope for further increase in electricity tariff due to ongoing legislative and judicial enquiries and thus forecast inflation to sizably taper in February 2017. For markets,  given that this reading is largely in line with expectations, we see little impact, if any, and expect concerns over FGN’s fiscal deficit to continue to dominate sentiment.


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