September 14, 2018/InvestmentOne Update
· Earlier today, the National Bureau of Statistics released the Inflation report for the month of August 2018, which showed a faster increase in consumer prices to 11.23% year on year (y/y) in August 2018, from 11.14% y/y in July 2018. This was largely in line with our base case scenario estimate (11.21%). We highlight that this was the first time since January 2017 that we saw a faster increase in Consumer Price Index (CPI) as the previous 18 months have been reflecting declines in headline inflation.
· As the high base effect of H1 2017 fades, inflationary pressures appear to be more prevalent on y/y reading. However, the headline inflation slowed down m/m to 1.05% in August 2018 from 1.13% in July 2018.
· In our view, the rise in y/y change in the Food-Sub index (13.16% in August 2018 vs 12.85% in July 2018) may have been responsible for the rise in y/y headline inflation.
· However, the Core Sub index moderated y/y (10.02% in August 2018 vs 10.18% in July 2018), while it was somewhat flat with a meagre 3 basis points (bps) month-on-month (m/m) decline to 0.78% in August 2018 compared to July 2018.
· We opine that the major driver of the rise in inflation appeared to be the Food Sub index, though it only increased by 2bps m/m to 1.42% in August 2018.
· With the high base effect bottoming out in August 2018, we expect inflationary pressures to filter into the y/y readings.
· As such, we are likely to see headline inflation continue to trend up in H2 2018. We highlight that the slow growth in Agriculture output, according to NBS’ GDP report for Q2 2018, could be a negative for food supply, thus putting pressure on food prices.
· Our opinion is further backed by inflationary prospects driven by the conflicts in the Northern region disrupting food supply, election spending, and the possible acceleration in the implementation of the N9.12trillion 2018 budget.
· As a result of the potential increase in money supply and inflationary pressures, we could see the Monetary Policy Committee (MPC) tightening its stance in H2 2018 by increasing the frequency of its open market operations with the potential of selling these bills at higher stop rates. This could help to fight against inflation though it could also be a negative for economic growth in the near term.