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Inflation peaks, highest in the last decade

Inflation peaks, highest in the last decade

In June, inflation continued its relentless climb to hit a y/y increase of 16.5%, easily eclipsing Consensus of 16.2% (Vetiva Estimate: 15.6%) and above the 15.6% print in May. The figure, the highest since October 2005, was driven by increases in both Food (15.3%) and Core (16.2%) inflation categories, underlining the general upward price trend for this year. The liberalization of the foreign exchange market and subsequent depreciation of the naira has intensified the inflationary pressures in the country. This pass through effect is strikingly reflected in the jump in imported prices for the month of June. On a monthly basis, inflation slowed to 1.71% from a 4-year high of 2.75% in May, driven by a m/m slowdown in both Food and Core inflation categories which recorded m/m growth of 1.44% and 1.83% respectively. The same trends were present geographically with the Urban Index rising 18.1% y/y, up from 17.2% in May but decelerating to 1.76% m/m from 2.96% in May. Likewise, the Rural index rose above 15% for the first time since Jan 2011, reaching 15.1% y/y (May 14.4%) despite rising only 1.58% in June from 2.5% in May.

Inflation in the first six months of 2016 averaged 13.3% y/y, a significant increase from 8.67% in the corresponding period in 2015. Meanwhile, according to the index, average prices have risen by 12% since the start of the year, reflecting the more severe impact of liquidity shortages in the foreign exchange market and instability in energy prices and food supply. The price trend is pointedly upwards and with increased volatility in the foreign exchange market, we expect sustained pressure on the naira may pass through to various indices. The introduction of forward contracts is yet to have the desired effect and the CBN is handicapped by the present threat of stagflation that tips its focus towards stimulating growth. As such, we do not expect much change in July (estimate: 16.9% y/y) and revise our 2016 average estimate to 15.3% (Previous: 14.5%).