May Inflation up 12.4%




Thursday, June 16, 2011 Vetiva Research
Further to the release of the May 2011 Inflation data by the National Bureau of Statistics (NBS) today, Vetiva provides thoughts on the Inflation figures:

Analyst Note
·         Inflation jumps 1.1pps above April levels to 12.4%:
After bucking the trend in April at 11.3% YoY, May Inflation edged higher at 12.4%, driven primarily by increases in the Food Index (YoY +12.11%), Housing, water, electricity and other fuel (YoY +18.71%) and Furnishing, Household equipment and maintenance (YoY +13.65%).
·         Base effect drives food inflation higher: We note the decline in MoM Food Inflation to -0.3% in May reflecting the reduction in soft commodity prices. The IMF Food index contracted -2.03% in May from +3.55% in April. The 0.6pps increase in Food Inflation to 12.2% YoY is attributable to a base effect (from May’10) where Food Inflation bottomed to its 13-month low of 13%.
·         Upside risks remain: We still think the near term risks to inflation is to the upside and see particular risks from high energy prices, implementation of the N18,000 minimum wage, imported inflation (if the pressure on the currency persists), and liquidity in the financial system. Whilst we note the risks to inflation from the possibility the deregulation of PMS, we attach a lower probability to the implementation of this policy by H2’11. The adverse implication on reserve accretion is worrisome, noting that the Government has spent c.$2billion in subsidies in the first 5 months of 2011.
·         Challenges for the MPC:
·         Despite a total of 175bps hike so far this year, the MPC is unlikely to relent on tightening, given the risks to inflation.

·         The Fiscal side continues to compromise the tightening efforts of the MPC through its monthly FAAC allocation. The three tiers of government shared N606 billion in May with a N169 billion augmentation from the Excess Crude Account (ECA), despite the passage of the Sovereign Wealth Act.

·         June and July’s inflation figures would have been made known prior to the next MPC meeting, and this will be a major determinant of the direction of rates. We expect June’s inflation to drift a little lower, buffered largely by reduced food inflation.

·         The MPC meets next on the 25th and 26th of July and the possibility of another hike is imminent if core inflation remains high and demand for FX continues to pressure the Naira (WTD depreciation of 0.79%, $825 million demand Vs. $600 million supply). ·        
. Yields appear priced in: While we would have expected the 20-year bond to ratchet up to adjust to current inflation realities, the impact appears muted as it closed marginally lower at 13.05% from 13.12% yesterday. Traders remain cautious given the volatility in inflation numbers in recent times, without a definite trend. We expect the market to continue to focus on the short tenors with yields on that end rising faster and a delayed rise at the long end.

. While Nigeria ’s Inflation rate is only slightly lower than that of Kenya (12.95% - May’11), it remains high compared to Egypt (11.79% - May’11) and Ghana (8.90% - May’11).
The Composite Consumer Price Index (CPI) rose by 12.4% year-on-year in May 2011. This is higher than 11.3% recorded in the previous month in the new CPI series. The monthly change of the CPI was 0.91% increase when compared with April 2011. The urban All Items monthly index rose by 0.2% while the corresponding rural index rose by 1.5% when compared with the preceding month. The YoY average consumer price level as at May 2011 for Urban and Rural dwellers rose by 11.5% and 13.0% respectively.
Average monthly food prices declined by 0.3% in May 2011 when compared with April 2011 figure. The level of the Composite Food Index was higher than the corresponding level a year ago by 12.2%. The average annual rate of rise of the index was 13.2% for the twelve-month period ending May 2011. The change in the month-on-month index was caused mainly by downward movement of the prices of some food items like vegetables, fruits and cereals.
The “All items less Farm Produce” index which excludes the prices of agricultural products increased by 0.9% in May 2011 when compared with April 2011. The increase was mainly on some household items, building materials, rents, diesel and kerosene. In the twelve-month to May 2011, the index rose by 13.0% while the average annual rate of rise of the index was 12.2% for the twelve-month period ending May 2011.
Authored by:  Adedayo IDOWUResearch Division, Vetiva Capital Management Limited, Plot 266B, Kofo Abayomi Street, P. O. Box 73530 Victoria Island, Lagos, NIGERIA, Tel: +234-1-4617521-3, 2700657-8; Fax: +234-1-4617524. Email: Website: 
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