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August Inflation Review - Inflation moderates slightly, but floods may drive rebound

NIGERIA INFLATION                                                         

Inflation moderates slightly, but floods may drive rebound                                                

Nigeria’s inflation declined for the eighth consecutive month this year, dipping to 16.0% y/y in August (July: 16.1%), in line with both Vetiva and Consensus estimates. The modest decline came on the back of persistent base effects – from high 2016 inflation – and a first sub-1.0% m/m inflation reading in August – 0.97% m/m to be precise, compared to 1.21% in July and YTD average of 1.43%. Across the major sub-indices, Annual Food Inflation dipped 33bps in august, holding at 20.3% y/y, following a decline in m/m Food Inflation from 1.52% to 1.14%. Meanwhile, the Core sub-index also rose at a slower pace m/m, registering at 0.93% vs. 1.00% in July but was unable to prevent a rise in y/y Core Inflation from 12.2% to 12.3%, as a result of a weaker August 2016 base.                                           

Looking at the month’s food price data, there looks to be no registered impact of the recent flooding in the Benue region which decimated substantial swathes of arable land and food storage facilities in the state. Notably, Food Inflation was comparably weak in Benue – 16.9% y/y and 0.6% m/m vs. 20.3% y/y and 1.1% m/m nationwide. We however anticipate a lagged impact and expect significant pressure on food prices in coming months, similar to that experience in the final quarter of 2012 when severe flooding lead to an acceleration in food inflation.                                       

Whilst we expect Core Inflation to moderate further, we do not see this outweighing the likely pressure on food prices in the coming months, at least until the respite of the peak harvest season. We have adjusted our model to account for this, and increase our September inflation forecast to 16.1% y/y (previous: 16.0% y/y). And although we have marginally increased our estimates for Q4’17 inflation, our 2017 average inflation forecast remains at 16.6% (2016: 15.6%). In light of recent yield declines in fixed income market, this bearish inflation outlook may prove a snag to MPC easing intention at upcoming meeting.