August 31, 2016/Cordros Research

Nigeria’s inflation rate climbed for the ninth consecutive month and the sixth month of relatively strong increase. Headline Inflation rose to 17.1% y/y (the highest rate since October 2005) in July, from 16.5% y/y in June, 2016; but was slightly lower than the 17.3% median forecast from Bloomberg’s survey. As expected, high food and energy prices remained major drivers for the continuous uptick in inflation. However, the month-on-month increase in CPI (1.3%) fell for a second successive month, indicating that the sustained pressure on prices experienced thus far in 2016 may be dissipating.

Food inflation: Imported inflation Continues to Put Pressure on Food sub Index

Food inflation jumped to 15.8%, from 15.3% in the previous month. On a m/m basis, food prices rose at a slower pace, rising 1.2% versus the 1.4% recorded in June. Imported inflation jumped to 20.5% from 20.0%, as the pressure from the weakening exchange rate continued to weigh on prices. The onset of the harvest season is yet to have a significant impact on food prices. The NBS also noted that on month-on-month basis, the highest price increases were recorded in the Fish, Potatoes, Yams and Other tubers; and Bread and Cereals groups. 

Outlook: The depreciation of the naira is expected to continue to drive the food prices higher in the near term and we expect this to continue to reflect in high imported food prices. Meanwhile, FEWS NET  cited forecasts by the Nigerian Hydrological Service Agency (NIHAS) for higher-than-average flooding during this raining season, as a factor which could impact crop and livestock production.

Core inflation: Energy and Electricity Sustains Pressure on Prices

Core inflation increased to 16.9% versus 16.2% in June. On a m/m basis, prices in the “All items less farm produce” index rose at a slower pace for a second consecutive month, rising by 1.2% versus 1.8% in the previous month. Energy prices, as well as other imported items (such as Vehicle Spare Parts) remained key contributors to movements in the Core index. Following a 45% and 22%  price increase in cooking gas and diesel between June and July, it was unsurprising  that Electricity, Solid Fuels, and Fuels was cited amongst groups that recorded the highest month-on-month increase in July. 

Outlook: We expect energy prices to continue to push core inflation higher, as the impact of 45% increase in electricity tariff lingers through year  while diesel and kerosene prices are vulnerable to (1) naira fluctuation and  (2)  foreign currency illiquidity.