Inflation Déjà vu in November

Monday, December 11, 2017 / 5:49PM /Vetiva Research

Nigeria’s inflation statistics for November came in very close to October readings, underscoring the current stickiness of inflation. Headline inflation registered at 15.9% y/y, the same as in October and slightly above Vetiva and Consensus estimates of 15.8% y/y. Similarly, Food Inflation registered at 20.3% y/y and 0.88% m/m in November, compared to 20.3% y/y and 0.85% m/m in October. Finally, Core Inflation registered at 12.2% y/y and 0.77% m/m in November, compared to 12.1% y/y and 0.76% m/m in October.

And beyond the usual challenges with food and energy prices, Nigeria’s underlying inflation is remarkably sticky. Annual Inflation (excl. food and energy prices) between August and November reads as follows: 12.70%, 12.71%, 12.73%, 12.72%. 

Food prices find serenity

Food inflation looks to have peaked in recent months (3-month average: 20.3% y/y), and this surge has been driven by increases in the prices of staples such as bread and cereal, milk, cheese, cocoa, and fish. We note that the severe food price pressures from the earlier parts of the year have subsided – Qtd average m/m inflation: 0.86% vs. 1.73% average in the first nine months of the year. On the imported food front, prices rose at a higher pace in November (15.7% y/y vs. 15.3% y/y in October), but the pace of price increase slowed on a monthly basis (1.24% m/m vs. 1.30% m/m in October).

Energy prices moderate but outlook is murky

Energy prices moderated across the country in November as prices of Household Kerosene (HHK), Premium Motor Spirit (PMS) and Automotive Gas Oil (diesel) declined 2.3%, 0.3% and 1.3% to ₦267.14, ₦145.60 and ₦199.26 respectively. This improvement in pricing is consistent with higher levels of product truckout reported by the Ministry of Petroleum Resources. Specifically, average daily truckout for dual-purpose kerosene (used as HHK), PMS and diesel rose from 0.7 million litres, 27.1 million litres and 5.0 million litres to 1.2 million litres, 31.3 million litres and 8.5 million litres respectively.

However, we highlight recent challenges with PMS distribution in some states of the country. Amidst recent higher oil prices, disruptions in getting refined products to the depots have 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.

Many inflation factors but outlook little changed

Ongoing stability in the exchange rate and food prices are significant positives for Nigeria’s inflation moving forward. On the other hand, whilst high global oil prices support Nigeria’s fiscal and foreign exchange position, they put pressure on petroleum product prices in the country. Nevertheless, we expect regulation and Nigerian National Petroleum Corporation interventions to cap the impact of relatively strong global oil prices. Meanwhile, we do not consider electricity tariff hikes to be politically feasible at this point and do not account for the prospect in our forecasts.

Finally, any effect of increased festive spending should be countered by base effects. Moving forward, we are keeping an eye out on the effect of any monetary easing by the apex bank on Nigeria’s pricing environment. Overall, we expect inflation of 15.7% y/y in December (Previous: 15.6% y/y), translating to 2017 average inflation of 16.7% (2016: 15.6%). With the inflation outlook little changed, we do not expect the apex bank to alter its near-term monetary course.

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