October 16, 2018/InvestmentOne report
· Earlier today, the National Bureau of Statistics (NBS) released the Inflation report for the month of September 2018, which showed a rise in headline inflation to 11.28% year on year (y/y) in September 2018, from 11.23% y/y in August 2018. This was below our best case scenario estimate of 11.43%. This variance in our estimate and actual inflation figure was due to lower than expected increase on month on month basis (0.84% actual vs 0.97% estimate).
· As the high base effect of H1 2017 faded out, inflationary pressures appear to be more prevalent on y/y reading. However, the headline inflation slowed down m/m to 0.84% in September 2018 from 1.05% in August 2018.
· In our view, the rise in y/y change in the Food-Sub index (13.31% in September 2018 vs 13.16% in August 2018) may have been responsible for the marginal rise in y/y headline inflation. However, it declined by 42bps m/m to 1.00% in September 2018.
· However, the Core Sub index moderated further, falling to the lowest rate of 9.80% y/y since February 2016 (9.80% in September 2018 vs 10.02% in August 2018). Similarly, it slowed down by 14 basis points (bps) month-on-month (m/m) to 0.64% in September 2018 compared to August 2018.
· We highlight that stability in the PMS price as well as exchange rate might have supported the slow growth in Core Sub Index. This could have led to slower increase in production cost and limited the potential for significant price increase.
· As a result of the bottoming out of high base effect in August 2018, we are likely to see headline inflation continue to trend up in Q4 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. In the same vein, imminent increase in minimum wage may cause a spike in general price level in the near term.
· On the other hand, the statement released by NNPC, that landing cost of the Premium Motor Spirit (petrol) being imported into the country has risen to at least N205 per litre on the back of the recent increase in global oil prices, may put more pressure for PMS price to increase in the near term. Nonetheless, we expect government to maintain the official PMS price at N145 per litre due to the effect any price increase may have on the current administration’s reelection bid in 2019.
· 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 Q4 2018 by increasing the frequency of its Open Market Operations (OMO auctions) 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.