Headline inflation declines further amidst price pressure

25 July 2018 ( Lagos ) : Nigeria’s headline inflation continued its descent in the month of June as it declined to 11.23% YoY (May: 11.61% YoY), although higher than analyst's expectation (ARM forecast: 11.01% YoY). As in prior months, base effect, largely from the food basket, underpinned the moderation in inflation even as MoM headline reading advanced to 1.24% (+15bps from 1.09% in April).

The deceleration in consumer prices was evident in both the core and food baskets, as YoY core inflation moderated to 10.39% (vs. 10.71% in May) while food inflation fell 47bps to a 26-month low of 12.98%—driven by base effect from higher food prices in corresponding period of last year.

As stated earlier, the Consumer Price Index rose 1.23% MoM in June (+15bps from 1.09% MoM in May) to touch its highest increase since June 2017 with pressure stemming largely from the food basket (+1.57% MoM vs. 1.33% in May). According to Famine Early Warnings System Network (FEWS NET), higher prices during the month came on account of the combined impact of depleting stocks, industrial demand and Ramadan which led staple prices to inch upwards compared to the previous month. Additionally, FEWS NET noted that there is shift in household consumption patterns from imported rice to locally produced cereals which also impacted on grain prices.

Elsewhere, MoM core inflation expanded by a modest 5bps to 1.03%, owing to jumps in ABTK1 (+14bps to 0.92%), Clothing (+7bps to 0.89%) and HWEGF2 (+3bps to 0.75%) inflation. Analysts link the 14bps increase in ABTK to the implementation of the new excise duty rates3 on Alcohol and Tobacco beginning June 2018 which led affected manufacturers to review their prices upwards.

At today’s conclusion of the 262nd Meeting of the Monetary Policy Committee (MPC), analysts expect the committee to maintain status quo despite the downtrend in inflation. Analyst's view is premised on the concerns expressed by the committee of a looming increase in liquidity in the second-half of the year from the implementation of the 2018 budget, rising FAAC distribution and election spending ahead of the upcoming 2019 elections, which combined could put pressure on domestic prices. 

More importantly, the possibility of lower net foreign flows over H2 18 suggest impending pressure on the reserves level which could dampen currency stability gains achieved. Hence, despite the decline in inflation to 11.23% which is 277bps lower than the Monetary Policy Rate of 14%, analysts believe concerns over looming build- up in liquidity and currency stability would dominate proceedings at the meeting.

Reporting for EasyKobo on Wednesday, 25 July 2018 in Lagos, Nigeria

Source: ARM Securities Limited

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