High Base Effect of 2017 Sees Headline Inflation Moderate to 15.13% in January 2018

Headline inflation declined for the twelfth consecutive month to 15.13% in January 2018

 ·         Earlier today, the Nigerian Bureau of Statistics released its inflation report for January 2018 which showed a moderation in headline inflation for the 12th consecutive month.

·         The consumer price index fell to 15.13% year on year (y/y) in January 2018, from 15.37% y/y in December 2017.

·         We highlight that the slowdown was mainly the result of the high base effect which was more prominent on the Food sub-index where prices inched up 18.92% y/y in January 2018 against 19.42% in December 2017.

·         Unlike in 2017, where the benefit of the base effect was more prominent in the Core sub-index, 2018 base effect is expected to be driven by the Food sub-index which surged to an eight year high in 2017, which may not be unconnected with the disruptions to productivity in the Agriculture sector.

·         On the contrary, we believe the on-going scarcity of PMS nationwide, which led to the c.30% y/y increase in the average price paid by consumers to N190/litre may have hindered the potential downward movement in the Core sub-index, unchanged at 12.09% y/y.

·         Month on month, headline inflation inched up 21basis points (bps) to 0.80% on the back of the increase in both the Food sub-index, +29bps m/m to 0.87%, and the Core sub-index, up +17bps m/m to 0.68%.

·         In our view, this highlights the inflationary pressures in the economy due to the shortage of PMS and the continued conflicts in the North, which could be hindering output in the Agriculture sector.   

Outlook 

·         We maintain our view that the rate of increase in consumer prices in 2018 is likely to slow on the back of the high base effect, which may be more pronounced in the Food sub-index.

·         Our opinion may be supported by the insistence of the administration to maintain stability in the economy in support of a potential re-election in 2019.

·         While this may keep the official price of PMS at N145/litre, we point out that the continued scarcity of the product which has seen the price paid by consumer rise c.30% y/y and c.11% m/m to N190/litre, poses a significant risk to the outlook for inflation if the availability does not increase in the near term.

·         Despite the stability in the local currency, which should be supportive of imported inflation, the continued unrest in the North, which contributed to the slowdown in activities in the Agriculture sector in 2017, could pressure the Food sub-index in the near term. 

Implications 

·         The moderation in headline inflation should be a supportive for the equities market in 2018, due to the potential positive impact it may have on company performances.

·         Given our view that a slowdown in the increase of consumer prices could pave the way for the Central Bank of Nigeria to move to a more accommodative interest environment, we could see yields at the fixed income market decline in 2018 which could further aid the performance of the equities market.

·         The potential slide in the yields in the fixed income market could be aided by the plans to refinance USD2.5billion worth of local debt with offshore borrowings.

·         The refinancing, which should lower the nation’s debt service to revenue ratio from c.45% could be a positive for the implementation of the proposed 2018 budget.

·         However, we highlight that inability of the administration to confirm its new Central Bank of Nigeria Deputy Governor and Monetary Policy Committee members and the potential for increase political risk in H2 2018 are downside risks to our views. 

Please click to download a copy of the Nigerian Bureau of Statistics’ Inflation Report for January 2018.