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August 2019 Inflation Review - Headline Inflation Moves Lower To Print At 11.02% Y/Y

Headline inflation moves lower to print at 11.02% y/y                                                   
Today, the National Bureau of Statistics released the CPI figures for August 2019. Headline inflation slowed for the third consecutive month to print at 11.02% y/y (July: 11.08% y/y), in line with our estimate of 11.01% y/y and lagging consensus estimate of 11.1% y/y. Similarly, food and non-food (core) inflation maintained a downward trend to 13.17% y/y (July: 13.46% y/y) and 8.68% (July: 8.80% y/y) respectively.

Should we expect further deceleration in food inflation?
In August, m/m food inflation slowed further to 1.22% - the lowest in the last four months. While herdsmen-farmer clashes have continued to hamper farming operations in the Middle Belt, we believe the slowdown in food inflation stems from tepid food demand, as economic activities have remained relatively frail since the Ramadan season which saw m/m food inflation spike to 1.41% in May. Looking ahead, we expect m/m food inflation to edge lower for the rest of the year, as harvest activities kickstart in September. However, the proposed increase in value-added tax (VAT) from 5% to 7.2% could potentially alter our outlook for food inflation.

Our expectations for September
We expect headline inflation to inch up slightly to 11.05% y/y in September, mainly due to softer base in the corresponding month of 2018. Meanwhile, we expect a further slowdown in food inflation to 12.74% y/y in September, on the back of improved crop supply from harvest activities. Also, we expect core inflation to sustain its downward trend, printing at 8.64% y/y in September. By year end, we envisage that headline inflation will average 11.18% y/y (2018: 12.15% y/y).

What will the CBN do?
With Saudi Aramco hinting that the restoration of its damaged facilities will take longer than initially expected, we envisage that Brent will continue to trade at current levels ($68/bbl) in the interim. That said, we expect higher crude receipts to support Nigeria’s foreign reserves. This anticipated improvement in foreign reserves, coupled with slowing headline inflation could entice the Central Bank of Nigeria (CBN) to seek more accommodative monetary policy to support real economic growth."