August 2018 Inflation Report – Base Effect Wanes as Disinflation Bottoms Out

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  ·         Last week, the National Bureau of Statistics released the Inflation report for the month of August 2018, which showed a faster increase in consumer prices to 11.23% year on year (y/y) in August 2018, than July 2018 (11.14% y/y). This was largely in line with our base case scenario estimate (11.21%) and not too far from our worst case estimate (11.32%).

·         We highlight that this was the first time since January 2017 that we saw a faster increase in Consumer Price Index (CPI) as the previous 18 months have been indicative of disinflation. This increase in inflation rate is an indication that the high base effect of H1 2017 has faded and inflationary pressures are now reflective in the y/y reading. 

·         In our view, the major driver of the y/y rise in headline inflation was most likely the 31bps increase in the Food Sub index to 13.16% from its readings in July 2018. Although it only increased by 2bps m/m to 1.42% in August 2018, we posit that it could have hindered further slowdown of the m/m rise in headline inflation.

·         However, the Core Sub index moderated y/y (10.02% in August 2018 vs 10.18% in July 2018), hitting its 31-month low. It was somewhat flat m/m declining a meagre 3 basis points to 0.78% in August 2018 compared to July 2018.

·         With the high base effect bottoming out in August 2018, we expect inflationary pressures to filter into the y/y readings. Our opinion is further backed by inflationary prospects driven by the conflicts in the Northern region disrupting food supply, election spending, and the possible acceleration in the implementation of the N9.12trillion 2018 budget.

·         As a result of the potential increase in money supply and inflationary pressures, we could see the Monetary Policy Committee (MPC) tightening its stance in Q3 2018 by increasing the frequency of its open market operations with the potential of selling these bills at higher stop rates.

·         Nonetheless, we are of the view that the rate of increase in consumer prices is likely to continue its upward trend towards the end of the year. We side more with the worst of our three possible scenarios (base, best and worst), with our projections for September and year-end at 11.68% y/y and 14.60% y/y respectively.