Inflation Review and H2 2018 Outlook

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17/8/2018/InvestmentOne Report

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·         Headline Inflation maintained its downward movement in H1 2018 on the back of the benefits of the base effect of H1 2017 and support from the stability in local currency. Consequently, we saw the increase price levels slow to 11.23% year on year (y/y) in June 2018, from 15.37% in December 2017.

·         The base effect was largely driven by the slower month-on-month (m/m) increase in headline inflation in H1 2018 against H1 2017, particularly in the Food sub-index where a sharp increase in domestic food prices pushed the sub-index to a 9-year high of 20.32% y/y in September 2017.

·         Notwithstanding, inflationary pressures were evident in the month on month (m/m) inflation readings in H1 2018, which were reflective of the scarcity of petroleum products, with Premium Motor Spirit rising as high as N190.9per litre in Q1 2018. With road being the main mode of transporting goods and services, the ripple effect of higher PMS prices were felt across the inflation basket.

·         Furthermore, we opine that the conflicts in the Northern region, which hindered agricultural activities and food supply as well as higher commodity prices in U.S. Dollar terms, may also have put upward pressure on prices. In the absence of these factors, we would have witnessed a steeper moderation in headline inflation y/y in H1 2018.

·         Overall, we believe the inflationary pressures arising and those yet to materialize are likely to accelerate the pace of the increase in consumer prices both m/m and y/y in H2 2018.

·         To illustrate how high headline inflation is likely to trend in H2 2018, we take the average change in the m/m movement in headline inflation for each corresponding month from 2013 to 2017. From this we derive of base case scenario where the average m/m increase in headline inflation in H2 2018 is 1.06% while year-end reading is 12.61%.

·         However, for our worst and best case scenarios, we look at the standard deviation of the change in m/m headline inflation between 2013 and 2017. As a result, we are arrive at a best case scenario with headline inflation closing 2018 at 10.28% with average m/m movement in H2 2018 being 0.70%.

·         With this said, we point out our best case scenario is highly unlikely. We side more with the worst case scenario in the event of heightened tensions in the Northern and significant election spending, which may see the average m/m increase in consumer prices rise to 1.41% in H2 2018 (0.93% in H1 2018) with December 2018 reading being 14.98%.

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