September 15, 2018/Cordros Report
As we had expected, headline inflation reversed its deceleration in the month of August (+9bps to 11.23% y/y) as the impact of base effect induced decline eventually ground to a halt. Nonetheless the moderation in the core the basket (-17bps to 10.02% y/y), rapid jump in food inflation (+31bps to 13.16% y/y) drove the uptick in headline inflation for the review period. Pointedly, the asymptotic rate of disinflation eventually flattened as month-on-month headline inflation print of 1.04% (July 18: 1.13% m/m) finally reflected in the year-on-year number. Again, the culprit was the food basket which printed faster by +2bps to 1.42% even as core inflation pulled back for the period (-3bps to 0.78% m/m).
Month-on-month reading to dictate headline direction
Going forward, we expect the impact of the main harvest season which commences in the North and South in September to exert downward pressure on food prices. That said, this is likely to be offset by the advent of flood in some producing states, combined with the unrelenting clashes of herdsmen and farmers. Precisely, cases of flooding activities have already been reported in Edo state following higher water levels in River Niger caused by heavy rainfall which reportedly destroyed crops such as cassava, yam, rice, maize, groundnut. On core inflation, we maintain our views on stable naira for the rest of year, with the reserves expected to remain strong enough for the CBN to continue to support the local currency via its intervention mechanisms. To add, irrespective of the recent uptick in PMS (August: +6bps) and Diesel Prices (+180bps), we believe NNPC will continue its strategic supply of petroleum product to steer clear of fuel shortages. Overall, we now look for average MoM headline of 1.06% through the rest of the year.
That said, with gains from base effect off the table, our views suggest that month-on-month will continue to lay bare on headline inflation. Against this backdrop, we expect headline CPI to print 11.54% y/y in September and close the year at 12.7% YoY (2017: 15.37% y/y)
In terms of monetary policy impact, we acknowledge the increasing case for a rate hike in the MPC’s recent meetings, hinged on excessive liquidity surfeit and the potential inflationary impact. To our mind, we note that the Committee has pre-empted the recent inflation uptick with guidance to the waning impact of base effect gains. Our expectation is that the MPC will refrain from a rate hike in its next meeting, given its implication on increasing borrowing cost, amidst the still fragile economic growth. Acknowledging the bourgeoning liquidity build up in the system, we believe the CBN will continue its hawkish policy via OMO rake hike.