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December Inflation Review - Year-end inflation offers hope for 2018

Year-end inflation offers hope for 2018                                                                               

December Inflation came in below Vetiva and Consensus expectation of 15.7% y/y and 15.8% respectively, registering at 15.4% y/y (November: 15.9% y/y) despite nationwide fuel shortages that increased average premium motor spirit (PMS) prices by 18% in the month. The decline in inflation at year-end is most markedly seen in the m/m inflation print – from 0.78% to 0.59% – which is the lowest since October 2015 and compares to a FY’17 average of 1.20%. Across the sub-indices, Food Inflation and Core Inflation moderated from 20.3% y/y and 12.2% y/y to 19.4% y/y and 12.1% y/y respectively.     

Food prices, the pressure point for most of 2017 (up 200bps from December 2016 to December 2017) have calmed in recent months, supporting the view of relative food price stability in 2018. Though up y/y (15.8% to 15.9%), Imported Food Inflation moderated from 1.24% to 1.12% m/m, a notable improvement from previous levels (prior 4-month average: 1.28%) and in line with the trend of declining global food prices – FAO index down 3% m/m in December.                                                                                

Nigeria’s inflation averaged 15.6% and 16.5% in 2016 and 2017 respectively, rising from 9.6% in January 2016, peaking at 18.7% a year later and now settling at 15.4% in December 2017. We hold the view that we are journeying out of the woods in terms of inflation. In 2018, we anticipate relative stability in domestic food prices and in the exchange rate, whilst we consider significant revisions to PMS prices or a hike in the minimum wage as unlikely over the next 12 months. However, we still expect some pass-through from higher energy prices as well as some inflationary effect of election spending in late 2018. With base effects from high 2017 inflation kicking in, we forecast average inflation of 12.8% in 2018 – with inflation moderating over the course of the year from 15.1% y/y in January 2018.