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January Inflation Review - Inflation begins 2018 descent with 15.1% y/y print

Inflation begins 2018 descent with 15.1% y/y print                                                                         

Registering at 15.1% y/y, January inflation came in line with Vetiva and Consensus expectations, also showing a moderation from 15.4% recorded in December 2017 as high base effects kicked in. Notably, Food Inflation declined from 19.4% y/y in December 2017 to 18.9% y/y in January 2018, though Core Inflation remained flat at 12.1% y/y. Inflationary pressure picked up slightly at the start of the year as monthly (m/m) inflation rose from 0.6% in December 2017 to 0.8% in January 2018, with both Food (0.6% to 0.9%) and Core (0.5% to 0.7%) inflation accelerating on a month-on-month basis. We partly attribute this uptick to a steady increase in energy prices across the country, particularly premium motor spirit (PMS), which rose 11% from December 2017 levels.                                                                           

At a national average of ₦191 (December national average of ₦172), PMS prices are 32% above the regulated pump price of ₦145. This increase can be attributed to higher oil prices in recent months (January Brent crude average: $69/bbl vs. $64/bbl in December) which has kept landing cost of PMS above ₦145. Stripping out food and energy prices, inflation is sticky at 12.7% y/y (6-month average: 12.7%) with m/m inflation hovering around 0.8% during that period. The respective levels of y/y and m/m inflation show that some inflationary pressure remains and may dissuade the Monetary Policy Committee from enacting an aggressive cut in the monetary policy rate until we see a material change in underlying inflation in the coming months.                                                                     

Base effects from the first half of 2017 will be extremely important in determining headline inflation in H1’18, particularly on food prices (H1’17 average m/m inflation: 2.0%, H2’17 average: 1.0%). We expect the moderation in Nigeria’s headline inflation to persist as relative currency stability augment base effects. The key pressure point in the near-term remains energy prices, although the recent decline in global oil prices (Brent crude prices down nearly 10% so far this month) may offer some respite. Amid these, we forecast 14.7% inflation in February, bringing average annual inflation forecast for 2018 to 12.8%.