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Inflation Notes (Post-Release) August Inflation Review - Inflation Matches Expectation, Further Rises Ahead

Inflation rose from 11.1% y/y in July to 11.2% y/y in August, in line with Vetiva estimate but ahead of Conesus expectation of 11.1% y/y. Meanwhile, month-on-month (m/m) inflation moderated slightly—from 1.1% to 1.0%, indicating that the rise in headline inflation was as a result of a lower August 2017 base. Across the sub-indices, Core inflation registered at 10.0% y/y (July: 10.2% y/y) and 0.8% m/m (July: 0.8% m/m) whilst Food inflation remained flat at 1.4% m/m but rose from 12.8% y/y in July to 13.2% y/y in August, the first increase since November 2017, showing the effect of persistent food price pressure in recent months.

Inflation is progressing as we expected, and we see further rises in the coming months, on the back of persistent food price pressure, fiscal injections, and waning base effects. This is in line with the thoughts of the Monetary Policy Committee (MPC) members, with Adeola Adenikinju explaining, “There is a genuine anxiety about liquidity surfeit in a pre-election year, with anticipated high election spending, as political parties fail to keep to election spending guidelines, late passage of the 2018 appropriation bill, the supplementary bill submitted to the National Assembly…” in his July MPC statements.

We maintain our forecasts for September (11.6% y/y) and 2018 average (12.2% y/y) as inflation continues to trend in line with our expectations. Furthermore, we do not expect the MPC to be more angsty over August inflation as the committee has long-since anticipated a rebound in inflation i.e. at recent meetings, the inflation expectations of the MPC have been higher than actual inflation, yet we have not seen a rate hike.