Sticky Food Prices Limit Headline Inflation Moderation at 16.05% y/y

August 28, 2017/Cordros Research

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Earlier today, the National Bureau of Statistics (NBS) released the Consumer Price Index (CPI) report for the month of July, showing that Nigeria’s inflation rate increased by 16.05% y/y, 5 bps lower than the 16.10% recorded in June, marking the sixth successive y/y decline in the headline index. Broadly in line with our forecast, albeit 10 bps ahead of Bloomberg’s compiled average estimate of 15.95%, the inflation figure is consistent with the sense that the base effect driven moderation expected at the beginning of the year has waned. Again, the fact that the headline index came above consensus, as has been the trend thus far this year, further corroborates the case that prices remain sticky downward. Good to mention, however, the month-on-month price increase of 1.21%, 37 bps lower than June’s 1.58%, is the second consecutive m/m moderation recorded thus far in 2017, and the lowest since January (1.01%).

Food Prices Remain Fundamental to Headline Inflation

Clearly, the direction of headline inflation for the rest of the year will be largely driven by food prices. Save for potential risk of negative surprises, specifically with regards foreign exchange, and the possible increase in electricity tariff, we expect continued moderation in the core component.

Drilling down events vis-à-vis food prices, results being reported in most areas vis-à-vis the dry season harvest are generally favourable. The raining season has commenced with near-normal timing and cumulative rainfall across most of the country, in line with earlier guidance for the rainy season through September/October for average to above-average cumulative precipitation. In its latest report, FEWS NET revealed that outside of the northeast, staple harvests that begin as late as October in northern areas are likely to be more robust than last year’s, due to increased access to inputs as well as strong production incentives for farmers due to very high staple food prices, in addition to increased government funding and support. Granted, incidence of flooding has been reported in most parts of the country but not primarily on the back of unusually heavy downpour. More so, affected areas were largely residential not farmlands.

That said, for the rest of 2017, we maintain our position that except monthly inflation rate stays below the 1.5% average recorded since the beginning of the year, the likelihood of the headline index reaching 20% by December cannot be ruled out. To be specific, we forecast the headline inflation rate in 2017 to average 16.10% (bull case) or 17.73% (bear case).

Meanwhile, we look for the CPI recording a marginal decline to 16.03% y/y and 1.00% m/m in August.

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