NIGERIA: Base effects drive headline inflation to single-digit levels


Monday, February 18, 2013 7:28 PM / DLM Research

Inflation rate sheds 300bps to 9%. Inflation rate in Nigeria recorded a significant decline to 9% y/y in January 2013 - 300 basis points lower than 12% recorded in December 2012; this is the highest y/y decline in inflation rate since April 2008. The lower y/y change was largely attributed to base effects as the broad economy recorded higher price levels in the corresponding period of the previous fiscal year against the backdrop of the removal of fuel subsidy and higher prices were further induced by temporary shortages in production; a direct consequence of the civil protests which disrupted economic activities. In our view, these factors muted the y/y changes exhibited in January.

During the month, composite CPI was higher by 0.62% m/m while the food index captured by “farm produce and processed foods” was higher by 10.01% y/y and 0.80% m/m with higher prices in bread and cereals, imported food, vegetables, fish, potatoes, yams and other tubers being the key drivers. In addition, core index increased by 11.30% y/y and 1.40% m/m. The increase in the core index was as a result of increase in the housing, electricity, gas and other fuels, in particular liquid fuels (kerosene), actual rental and imputed rent prices, garment prices, and non-durable housing goods. 

Core inflation drops by 240bps to a new 12-month low. Beyond the contribution of base effects to the decline in y/y inflation, lower price changes in non-food items contributed to the lower core and headline inflation levels. This is in view of the moderation in core inflation to 11.30% y/y from the 13.70% recorded in the previous month. As a result, core inflation index is at the lowest level recorded since December 2011.

9% inflation bolsters positive real rate. As a result of the decline in inflation, real rate in Nigeria increased to 2.45% from 0.20% last December. Following a tight monetary policy stance, average yield on Nigeria’s government securities rose to a 3-year high of 15.43% in February 2012 – the same month, real rate recorded a 1-year high of 3.53%.  Prior to this, real rate hit a 3-year high of 4.2% in December 2011 after being negative for the most part of 2010 and 2011.


We expect to see a reduction in Monetary Policy Rate (MPR) in the coming month even as macro indicators remain positive. Ahead of the meeting of the MPC in the coming month and easing inflationary threats, we still maintain our position on gradual reduction of the benchmark rate. Our optimism is further informed by the positive macro indicators, in particular the relative stability in exchange rates and significant increase in the level of foreign reserves.

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