Inflation: Soft Headline, But MoM is Firming


December 6, 2017/ARM Research

In the month of October, Nigeria’s consumer price index sustained its moderation, to a 17- month low of 15.91% YoY, as modest gains from food offset a slight increase in the core basket. 

The latter increased by an annual rate of 12.14%, 2bps higher than September’s reading, largely underpinned by subsisting inflationary pressures across key sub-sectors3. Elsewhere, while food inflation attuned to the impact of harvest season on food prices, the scale of moderation expected was capped by pressures in processed food and imported food segments. 

Consequently, food inflation moderated slightly by 1ppt to an annual rate of 20.31%. From a MoM perspective, inflation declined by 3bps, largely reflecting pressures in both the food and core component. 

For food, while we had anticipated gains from the ongoing harvest season and further decline in transport inflation, energy induced pressure on transport—driven by increased diesel prices—sticky farm produce (+0.75% MoM) and processed food inflation (+1.79% MoM) tamed moderation in food inflation against our expectation. 

Food inflation came in lower by 0.28pps to 0.85% which trumped prior five-year October average forecast of 0.71%. 

Going forward, given the conclusion of the main harvest in October, we now expect firming MoM headline inflation to be evident in the month of November underpinned by an uptick in food inflation which should offset gains from subdued core inflation reading. 

Our expectation for elevated MoM food inflation is largely reflective of sticky transport inflation supported by higher diesel prices as well as ramp-up in the demand for cereals and other food produce against the imminent approach of the December festive period. On the core front, we expect MoM reading to sustain its deceleration into November against the backdrop of fading supply shocks. 

On balance, we now look for MoM headline inflation reading of 0.88% in November 2017 with the implied YoY reading expected to come in at 16% YoY. In December, we expect MoM headline inflation to remain elevated on the back of inflationary pressures emanating from the food side –a fallout of the festive season – while sustained FX liquidity continues to drive moderation in MoM core inflation. 

Overall, we look for December and 2017 mean YoY headline inflation of 16% and 16.61% respectively.  

Proshare Nigeria Pvt. Ltd.

Going into next year, our views on inflation remains unchanged as we see little room for a significant shock to headline inflation reading, especially from energy prices where we think political considerations will be key factor.

Consequently, on the back of a high base in 2017, we forecast headline inflation to hover around 13.3% over H1 18. The consequent of the foregoing will neuter any argument for positive real return.