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April Inflation Review - Accelerating food prices drive inflation

Bucking expectations once more, Nigeria’s annual inflation registered at 17.2% in April, marginally lower than 17.3% in March but ahead of Vetiva and Consensus estimate of 16.9%. Month-on-month (m/m) inflation dropped to 1.62% (March: 1.72%), above the 12-month average of 1.33%. In keeping with this year’s trend, Food Inflation was the primary driver, clocking in at 19.3% – an 8-year high, as the food index rose 2.04% m/m (March: 2.21%). In contrast, steered by lower m/m inflation (April: 1.10% vs. March: 1.32%), Core Inflation moderated to 14.8% y/y, the lowest reading since the corresponding period of 2016.

Food Inflation is at worryingly high levels. The index is up 8% in the first four months of the year and at current pace, national food prices would have risen 27% by the end of 2017. This price surge is a domestic phenomenon as Imported Food Inflation moderated – 18.1% in March to 17.0% in April – understandably given the improvement in liquidity in the foreign exchange market, relative stability of the exchange rate, and downtrend in global food prices. From a regional perspective, pressure on food prices is most apparent in the South-East and North-West regions, driven by food prices in Enugu and Kano respectively. Looking at data from the National Bureau of Statistics Select Food Prices Watch 2017, domestic food prices have been trending upwards, though average price of tracked items fell marginally (0.9%) m/m.

The Monetary Policy Committee of the Central Bank of Nigeria meets next week and they will mull over recent inflation figures. Unfortunately, we consider the policy levers in their arsenal as inadequate for tackling the current inflationary pressure in the country. Persistent CBN intervention in money and foreign exchange (FX) markets ensures minimal excess naira liquidity and current inflation is neither a demand nor monetary phenomenon. Instead, we expect a continuation of trend so far as food prices weigh on the consumer basket even as better FX liquidity stabilizes the currency and suppresses imported inflation. In light of this and with base effects kicking in strongly next month (largest m/m jump observed in 2016), we forecast inflation of 15.8% in May, bringing 2017 average inflation to 15.8%, notably higher than 15.6% recorded in 2016.