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Base effects dictate inflation trajectory

• Nigeria’s headline inflation decelerated for the second consecutive month (-50bps) to 17.3% in March – though lagging the scale of moderation in prior month’s reading (-92bps). Instructively, the reading was significantly behind Bloomberg consensus estimate of 16.7% as changes in food inflation (-10bps to 18.4% YoY) failed to keep pace with expected impact of naira gains at the parallel market in the review month. That said, high base effect from 2016 electricity and PMS price hikes saw core inflation decelerate a further 60bps to 15.4% to dictate overall YoY headline trajectory. On a MoM basis, headline inflation increased by 1.72% (vs. 1.49% in prior month’s reading) largely reflecting unyielding food pressures (MoM: 2.21%).

• Core reading bows to base effect yet again: Focusing on core inflationary movements, breakdowns indicate a 1.32% MoM increase in the core basket buoyed by increases in prices of miscellaneous services related to dwelling, solid fuels, clothing materials, spirits, lubricants, and personal transport. Also, despite moderation in prices of some known energy components (PMS (-0.3% MoM), Kerosene (-14.2% MoM) and Diesel (-5.4% MoM)), pressures from other sources (e.g. solid fuels) drove energy inflation higher to 1.4% MoM. The foregoing combined with the pressures on miscellaneous services front drove core inflation higher in the review month.

• Food pressures show no sign of abating: In line with the trend over the prior months, MoM food inflation printed at 2.2% (vs. February reading of 1.99%) despite naira gains at the parallel market in March. According to FEWSNET, pressures on Nigeria’s farm produce prices persisted despite recent gains in foreign reserve (+0.4% to $30.4 billion) and direct government intervention due to structural challenges, restriction on use of forex reserve for food imports as well as higher transactions and transportation cost (March transport inflation: +1.2% MoM, +15% YoY) in the review period. For context, we note that the cost of transportation between assembly markets in North Central and other Northwest states of Nigeria, particularly to Dawanau market in Kano, increased by about 70% compared to last year.

• Going forward, we expect impact of high base effect to continue to dictate core inflation and overall headline trajectory despite concerns on the food inflation front. Precisely, high base effect from 45% and 68% increases in electricity and PMS prices in 2016 should leave YoY core reading subdued with recent gains in PMS, kerosene, and diesel prices leaving scope for sustained decelerations. Against this backdrop, we now look for headline reading of 16.7% YoY for April with 2017 mean now printing at 15.4% YoY (2016: 15.6% YoY).

• In terms of market impact, elevated MoM inflation readings provide another justification for CBN to leave its hawkish monetary policy intact over the near term. That said, given the impact of contractionary monetary policy on FG’s borrowing cost with April 2017 subscription (N111 billion) significantly below amount on offer