14 June 2018 ( Lagos ) : Nigeria’s inflation came in at 11.6% y/y in May, above Vetiva and Consensus estimates of 11.3% y/y and 11.4% y/y, albeit lower than April inflation of 12.5% y/y. The decline in inflation was primarily driven by a high May 2017 base (m/m inflation: 1.9%) as m/m inflation in May 2018 actually rose to 1.1% from 0.8% in April – the highest m/m inflation since July 2017. Across sub-indices, Core inflation declined slightly y/y – from 10.9% to 10.7%, but rose m/m – from 0.9% to 1.0%, whilst Food Inflation also declined y/y – from 14.8% to 13.4%, – but jumped m/m from 0.9% to 1.3%. 

Given the rise in m/m inflation, the moderation in annual Core and Food Inflation was as a result of aforementioned base effects. 

Insecurity pressures food prices 

Analysts note that although food inflation was down significantly y/y, it was much higher m/m, with additional pressure primarily coming from domestic food prices. Despite the sharp uptick in m/m food inflation, imported food inflation was little changed at 1.2% m/m. In terms of food prices, analysts point to the ongoing violence in the Middle Belt and the reported disruption to farming activities as a likely driver. 

In light of this, analysts are concerned that the uptick in food price pressure is here to stay and revise their inflation expectations in line with this view. 

Spotlight on Nigeria’s May blues 

For the past three years, May has been a particularly bad month for Nigerian inflation. May had the highest m/m inflation in 2016 and 2017, and analysts have now observed a material uptick in m/m inflation in May 2018. They note that the trend does not extend before 2016 and highlight one-off events as likely drivers of the phenomenon. In May 2016, Nigeria absorbed a sizable hike in petrol prices (from ?86.50 per litre to ?145.00 per litre) on top of an initial electricity tariff hike in February 2016.

 It is harder to determine the cause of high m/m inflation in May 2017; the introduction of the NAFEX window was the only significant economic change during the period. Analysts would hope that 2018 would follow the same trend where May represents the peak of monthly inflation. 

Inflation outlook revised higher on insecurity, government spending 

Analysts remain concerned about food prices given the security situation in the Middle Belt. In addition, analysts are cautious on demand-pull inflation given likely fiscal injections in H2. Analysts point to delayed budget passage (and subsequent front loaded capital disbursement) and pre-election spending as primary drivers of the expansionary fiscal policy outlook in H2’18 and foresee this and food price pressure becoming more influential as the high 2017 base begins to wane. 

Based on their view that m/m inflation would be higher in the second half of the year, analysts raise their June and average inflation forecasts to 11.1% y/y and 12.0% y/y respectively (previous: 10.5% and 11.6%).

Source: Vetiva Capital Management Limited