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January Inflation Review - Inflation rises to 18.7% at the start of 2017

• Nigeria’s inflation continued its ascent at the start of 2017 as January Headline Inflation reading clocked 18.7% y/y (December 2016: 18.6%) following a 1.0% m/m rise in national price levels (December 2016: 1.0%). This inflationary pressure can be traced to higher Food Inflation – 17.8% compared to 17.4% in the previous month – while Core Inflation fell for the third straight month – to 17.9% y/y from 18.1% in the previous month.

• The rise in food prices remained strong in January with m/m inflation registering 1.3%, similar to the December 2016 figure but higher than H2’16 average of 1.0%. The most significant price increases were observed on staples such as bread, protein, and tubers. Of note, Imported Inflation fell on a y/y basis for a consecutive month (21.0% vs. 21.1% in December 2016). Despite this positive development, the sticky m/m figure (c.0.9%) indicates marginal exchange rate pass-through from the parallel market, where the naira depreciated 2% during the month.

• The bearish outlook for petroleum product prices casts a shadow over the expected trend of Core Inflation. Any adverse changes here would complicate the expected shift to a looser monetary policy stance which the CBN Governor intimated at the most recent Monetary Policy Committee meeting in January. We have updated our model to reflect this upward pressure on petroleum product prices and forecast 17.2% inflation in February as base effects kick in, bringing FY17 inflation forecast to 13.8% (previous: 13.4%).