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Nigeria Strategy Report H1 2019 Excerpts - Nigerian Inflation - Boiling below the Surface

• In this session, we continue discussion with the domestic section of our core strategy document – the Nigeria Strategy Report. In this piece, we look at the major themes that dominated consumer prices and inflation in 2018 and delineate our outlook for Inflation over 2019.
• In our H2 18 NSR, we posited that the absence of potential increase in pump prices of premium motor spirit (PMS) and electricity tariff as well as mild moderation in food inflation will drive a downward trend in inflation over H2 2018. Precisely, we noted that the robust supply of Petrol by the NNPC across the country and kick-backs in the proposed increase in electricity tariffs by FG would drive moderation in transport and HWEGF baskets and invariably filter into both core and food inflation. In line with our views, headline inflation moderated by 174bps to average 11.27% YoY over H2 18, albeit at a slower pace relative to our expectation of 11.07bps to average 12.15% YoY over 2018. The decline cuts across core and food inflation. On the core basket, the moderation was hinged on the relatively flat movement in price of petrol which reflected the steady supply by NNPC in a bid to avoid scarcity while improved market supplies and harvest relative to the prior year drove the moderation in food inflation.
• In framing our outlook on Inflation for 2019, we have analyzed the possible shocks to the CPI, mainly from a currency shocks, possible increase in petrol (PMS) prices, a raise in electricity tariff and the introduction of a wage increase by the FG. However, we see no increase to general electricity tariffs in 2019 even as a possible new wage bill will have a minimal bearing on inflation given Nigeria’s inflation drivers. Consequently, we now expect a plausible depreciation in the naira as well as increase in petrol prices to be the key driver for our inflation outlook – which we foresee its occurrence in the latter part of 2019. We have adopted a blended approach of our regression and weighted average model to arrive at an average inflation rate of 12.4% over 2019 (2018E: 12.2%), which forms our base case scenario.