NSR Q4 2017 (7) – Inflation: Still an Eye into CBN’s Monetary Policy Mind

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October 12, 2017/ARM Research

Inflation has, without doubt, overwhelmingly influenced monetary policy discuss in the last few months with the CBN holding the reality of negative real return on investment as justification for a sustained hawkish monetary policy thrust. This position has persisted despite recent moderations in MoM core (-41bps to 1.06% June through August) and food inflation (-84bps to 1.16% since June).

Instructively, the deceleration in core inflation speaks to extended moderations in energy prices across the country (August: Petrol: -1.9% YoY, -2.5% MoM; Diesel: -0.15% YoY, – 0.70% MoM; Kerosene: -7.66% YoY, -0.49% MoM) while the surprise clampdown in food pressures reflected the duo of delayed pass-through from naira gains as well as the impact of higher domestic production of key agricultural produce in the wake of CBN’s move to blacklist the importation of some locally available products which was further bolstered by the run-up to main harvest season in the south.  
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Despite the retrace in food price pressures in August, we still hold the view that the last flooding disrupted harvesting in September, with knock-on effect likely to keep MoM food reading ahead of trend levels. Elsewhere, despite the recent blip, we expect YoY core inflation to resume deceleration in September as gains from monthly improvements in FX liquidity become more telling.

However, largely reflecting flood-induced food pressures, we now look for MoM headline reading of 0.95% for September (average in the three years leading to 2016: 0.79% MoM) which translates to a YoY inflation of 16.14% for September. Farther out (over Q4 2017), we expect MoM food inflation to print above trend levels despite the commencement of main harvest season (2017 mean: 0.81%; average in five years leading to 2017: 0.78%).

This view is aided by extended flooding in key agricultural communities such as Benue, wherein portions of farmland and food storage facilities were washed away. The case for core inflation remains premised on extended deceleration in energy prices which have, not surprisingly, intersected with steady improvements in FX market liquidity that we expect to subsist at least in the near term. In view of the foregoing, we now forecast mean headline inflation of 16.6% over 2017 (vs. 15.6% in 2016).

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High 2017 base implies cap to 2018 price increases. Going into 2018—the year preceding 2019 general elections, we see little scope for substantial shocks on the inflation front. To be clear, higher crude oil production while sustained premarket initiatives look set to keep encouraging autonomous dollar inflows. In addition to this, the FG would have little or no motivation to tow the unpopular path of full PMS deregulation or significant alterations to electricity prices amidst, what looks set to be, a tough electioneering campaign.

With no inflationary shocks in sight therefore, we see scope for substantial deceleration in headline inflation in 2018 owing largely to high base effect from 2017. That said, increased electioneering spending—expected to commence in the latter period of H2 18—raises scope for some temperance in the pace of inflation deceleration towards the close of the year. For us, headline inflation should average 12.6% over H1 18.