Wednesday, March 16, 2016 11:05AM / Vetiva Research
According to the Consumer Price Index report published by the Nigeria Bureau of Statistics (NBS), headline inflation accelerated sharply to 11.38% y/y (Vetiva estimate: 9.8%) in February, the highest increase recorded in 38 months.
This jump in general price levels was largely driven by a surge in the disaggregated Core CPI, hitting double digit region for the first time since February 2013, and an eleventh consecutive month quickening in food inflation to 11.35% y/y.
Core inflation came in 220 basis points higher at 11.04% y/y compared to January, owing to a faster and broad based acceleration in all key divisions, save for the Restaurants and Hotels divisions.
Similarly, on m/m basis, the headline index rose at a faster pace of 2.3% relative to the 0.87% recorded in January, the highest monthly increase recorded in 8 years and significantly higher than the 5-year m/m February average of 0.64%.
Food inflation quickens to 43-month high
Food inflation (50.7% of the CPI) peaked at a 43-month high following an eleventh consecutive increase in the food index to 11.35% y/y compared to the 10.64% y/y recorded in January.
Likewise, the index increased at a faster pace of 1.38% on a monthly basis, the fastest m/m rise since March 2012 and well above the 5-year average of 0.96%. Unsurprisingly, the imported food index, which makes up about 13% of the food CPI, increased by 13.19% y/y (Jan: 11.22%), with a similar m/m trend at 2.7% (Jan: 1.02%).
We believe the sharp acceleration recorded in consumer prices remains largely driven by the pass through of the tight FX supply in the official market and corresponding depreciation of the Naira in the parallel market, falling as low as NGN405/USD during the month from NGN291/USD average in January.
Core inflation surges on broad-based acceleration
Core inflation accelerated 11.04% y/y (Jan: 8.84%) and 2.73% m/m (Jan: 0.84%), representing the highest m/m increase since March 2012. The disaggregated core CPI revealed broad based acceleration as all the 10 sub-categories recorded in the “All items less Farm Produce index” increased at a faster pace compared to January, save for the Restaurants and Hotels division.
Notably, the Housing, Water, Electricity and Other fuels division (Utilities - 17% of the Core CPI) recorded the largest rise of 13.93% y/y and 6.76% m/m, reflecting the new Electricity tariff which came in effect 1 February 2016. Also, the Transport index increased 11.50% y/y (Jan: 10.64%) and 1.39% m/m (Jan: 0.86%) despite the 9% m/m decline in petrol prices to N99.76 (according to the PMS Monthly Watch for the month of February).
2016 average inflation revised sharply to 11.5% y/y
We believe the spike in core and food inflation relative to the previous years is attributed to the exchange rate pass-through which has affected consumer prices in both sub-indices through the imported/processed food components and has also pervaded domestic prices (noting the 11.34% y/y and 1.38% m/m rise in domestic food prices).
In light of the extent of the cost push effect of the exchange rate conundrum on the CPI, we have revised our 2016 average headline inflation figure to 11.5%. Our revised estimate indicates that inflation will reach a high of 12.4% y/y in October before ending the year at 12.2%.
That said, we do not expect to see m/m figure as high as that of February as a slower price increase in the Utilities division and reduced naira volatility serves as a buffer. We expect fixed income securities to sell sharply in the next trading session. The largest risk to our outlook remains FX liquidity.