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November Inflation: Uptick in core inflation brakes, as food pressures resumes

• Data released this morning by the National Bureau of Statistics (NBS), revealed that the headline inflation increased by 11.28% YoY in the month of November, higher than 11.26% reported in October and our estimate of 11.25%. In line with our thesis, the pressure during the month stemmed from the food index, which rose 2bps to 13.3% YoY, to more than overshadow the moderation in the core index (-10bps to 9.79% YoY). Given the uptick in the headline index despite a decline in the core index, we are wary of this development. For context, with our estimates revealing that the food index accounts for ~51% (core basket: ~49%) of the headline index, we believe the 2bps expansion in the food index is not enough to have offset a 10bps contraction in the core index.
• Month–on–Month, the food index ticked up by 0.9%, 8bps higher than previous month. While market supplies increased in the period – buoyed by favourable harvest in the month as reported by FEWSNET – we believe increased market demand in anticipation of festive activities drove higher food prices during the month. According to NBS, higher prices were evident in cereals, fish, vegetables, bread and tubers.
• Meanwhile, core index moderated by 0.68%, down from 0.8% in the month of October – reflecting the slower pace of increase in prices across the sub core basket. Specifically, clothing sub-index remained flat (Oct: +3bps), alcoholic beverages up 3bps (Oct: +4bps), furnishings, health and transport sub-index up by 1bps (Oct: 2bps) – which together account for 48% of the overall core basket. On the flip side, the HWEGF inflation went up by 7bps this month (October: -2bps) which for us comes as a surprise given the decline seen in Brent prices during period (-28.5% MoM to $75/barrel), which we believe should have resulted in lower diesel and cooking gas prices during the month.
• Going forward, as the custom during the festive season, we expect increased market demand in December – especially for cereals, fish, meat, cheese and egg, vegetables, bread and tubers – with knock-on impacts on the food index. On core index, we expect the lagged impact of a deceleration in energy prices to drive major sub core baskets lower, particularly the HWEGF. However, given our skepticism on the recent data, we have left our estimate for December at 11.49%, with average inflation rate for the year expected to print at 12.1% (FY 17:16.5%).