Nigeria Inflation: Currency pressure weighs on headline inflation


Wednesday, March 18, 2015 2:40PM /
United Capital Research

· The National Bureau of Statistics (NBS) recently released the CPI print for February 2015 showing a y/y inflation rate of 8.4% (January, 8.2%) in line with our estimate.

· According to the NBS, all major divisions that contributed to the index increased at a faster pace during the period. This was evident in both the food and the core indices.

· Food prices as observed by the Food Sub-index increased at a faster pace in February partly driven by increases in prices of imported food items.

Core Index accelerates…

For the second month running, the core index, which excludes the prices of volatile agricultural products, increased at higher pace month-on-month. Prices rose from 6.8% in January to 7.0% in February. The pressure points were across almost all nonfood components of the index including key household items. The strongest increases were recorded in the “Furnishings & Household Equipment Maintenance”.

The average 12-month annual rate of rise of the index was recorded at 6.9% for the 12-month period ending February 2015, similar to the 12-month rate recorded in December.

We had expected to see a much faster growth in the core index for February relative to January largely on the back of increased political spending as well as continued pressure on the Naira. We note however that the recent devaluation of the Naira will continue to drive the core index going forward; hence we think the pressure on headline inflation will persist.


…as pressure on food prices resumes
The pressure on food prices appears to be back after two months of relative stability. Food price index stood at 9.4% y/y in February relative to 9.2% in January and December 2014. The Index still remains 30bps above the 12-month low of 9.1% recorded in November 2014.

However, on a month-on-month basis, increases in food prices slowed as the index increased by 0.7% compared to 0.9% in January as price increases slowed across most groups that contributed to the Food sub-index. Price increases slowed for all groups that make up the Food index except for Vegetables; the highest price increases were recorded in the Potatoes, Yams and Other Tubers”, Fish, Meat and Vegetables as well as “Bread and Cereal” groups.

We think the resumption of growth in the food index is mainly due to the reduced effect of the harvest season which had earlier spilled over into the New Year. It is interesting to note however that the 12 month average annual rate of change of the Food index has held steady for 9 consecutive months. We expect continued pressure on food prices in the coming months as planting season commences (typically April to June). However the possibility of off-season harvest may temper price movement even as the recent successes recorded by the Nigerian Military in containing the Boko Haram Insurgency in the North East should impact positively on food prices.

That said, we believe imported food items will continue to be pressured by the recent
devaluation of the Naira.

Outlook and forecasts for March
Given that a further devaluation of the Naira, which remains our key risk to inflation, has now crystallized, we expect the lagged impact to continue over the next 4-6 months. However, if the post-election environment turns out more volatile than we currently anticipate, we could see inflation rates hit double digit faster than recent trends suggest.

As we noted in our 2015 outlook report (A Tale of Two Halves) the fiscal and monetary environment will remain tight after the polls given current macro economic realities. This, in our view, suggests that the historical susceptibility of the price level to disproportionate fiscal spend is likely to abate going forward, though structural rigidity occasioned by infrastructural bottleneck may worsen. Our model suggests that March headline inflation should inch down to 8.3% on account of softer increase in food inflation and relative stability in exchange rate.

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