January 18, 2018 /12:40 PM /Vetiva
December Inflation came in below Vetiva and Consensus expectation of 15.7% y/y and 15.8% respectively, registering at 15.4% y/y (November: 15.9% y/y) despite nationwide fuel shortages that increased average premium motor spirit (PMS) prices by 18% in the month. The decline in inflation at year-end is most markedly seen in the m/m inflation print – from 0.78% to 0.59% – which is the lowest since October 2015 and compares to a FY’17 average of 1.20%. Across the sub-indices, Food Inflation and Core Inflation moderated from 20.3% y/y and 12.2% y/y to 19.4% y/y and 12.1% y/y respectively.
Food prices, the pressure point for most of 2017 (up 200bps from December 2016 to December 2017) have calmed in recent months, supporting the view of relative food price stability in 2018. Though up y/y (15.8% to 15.9%), Imported Food Inflation moderated from 1.24% to 1.12% m/m, a notable improvement from previous levels (prior 4-month average: 1.28%) and in line with the trend of declining global food prices – FAO index down 3% m/m in December.
High crude oil prices are bad news for petroleum products
In our November Inflation note “Inflation Déjà vu in November”, we highlighted that “Amidst recent higher oil prices, disruptions in getting refined products to the depots has exerted pressure on the price charged by the depots and this, in turn, is pressuring the pump price. Amidst strike threats by petroleum marketers and queues building up, we see a greater risk of black markets for the product in the interim”. Unsurprisingly, PMS prices spiked during the month, surging to an average of ₦171.79 per litre, the highest on record. Price pressure was most keenly felt in the South-East region of the country where prices averaged ₦190.90 per litre. In addition, kerosene and diesel prices were also up m/m – 6% and 3% respectively – as higher global crude oil prices squeezed importers. We note that the petroleum product price spike did not materially affect Core Inflation in December, with the only notable uptick coming in Transport Inflation which increased m/m from 0.78% to 0.91%. With oil prices still above $60/bbl (December average: $64/bbl, Ytd average: $69/bbl), landing cost of petroleum products remain high, discouraging importation and pressuring the retail price of these products. Whilst we expect continued pass-through to kerosene and diesel prices despite NNPC intervention, we expect a more muted price response for PMS. Specifically, we do not envisage that there will be a price revision or deregulation given the proximity of elections. Rather, we anticipate either a continuation of the current regime where NNPC imports and distributes to marketers or the introduction of an implicit foreign exchange subsidy. However, we note that the persistence of the status quo would likely mean intermittent product shortages during the year – as long as oil prices remain strong – and some pass-through to the realized retail price like we saw in December.
Out of the woods?
Nigeria’s inflation averaged 15.6% and 16.5% in 2016 and 2017 respectively, rising from 9.6% in January 2016, peaking at 18.7% a year later and now settling at 15.4% in December 2017. We hold the view that we are journeying out of the woods in terms of inflation. In 2018, we anticipate relative stability in domestic food prices and in the exchange rate, whilst we consider significant revisions to PMS prices or a hike in the minimum wage as unlikely over the next 12 months. However, we still expect some pass-through from higher energy prices as well as some inflationary effect of election spending in late 2018. With base effects from high 2017 inflation kicking in, we forecast average inflation of 12.8% in 2018 – with inflation moderating over the course of the year from 15.1% y/y in January 2018.