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February Inflation Review - Sizable February drop bodes well for 2018 inflation

Trending below Vetiva and Consensus expectations of 14.7% y/y and 14.5% y/y respectively, Nigeria’s inflation registered at 14.3% y/y for February 2018, much better than the 15.1% y/y in January 2018 and 17.8% y/y in the corresponding period of 2017. The sizable decline in headline inflation was primarily driven by moderating Food Inflation (18.9% y/y to 17.6% y/y) and supported by lower Core Inflation (12.1% y/y to 11.7% y/y).

Prices rose 0.8% on average in February, unchanged from the previous month. In fact, month-on-month (m/m) inflation has oscillated within a 0.75%-0.80% band in the last six months, excluding the dip to 0.59% in December 2017. Average m/m inflation for the six-month period is 0.75%, and the rigidity in m/m inflation looks eerily close to a constant growth rate in prices.

Base effects will continue to be the primary driver of inflation moderation in the near-term, especially as the effects of high 2017 food inflation begin to kick in strongly. Meanwhile, energy prices and currency pass-through remain the salient short-term concerns. We have incorporated the near-constant growth in monthly prices in recent times and also account for likely food price pressure later in the year. Overall, our inflation expectations are buoyed by rigidity in monthly inflation at a relatively low level (0.75%-0.80%). As such we forecast inflation of 13.3% y/y in March (previous: 14.2% y/y) and full year inflation average of 12.0% (previous: 12.8%).