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July Inflation Review- Inflation rises amidst slower monthly growth

Year-on-year inflation in July registered 17.1%, compared to Vetiva and Bloomberg Consensus estimates of 17.2% and 17.3% respectively. This is higher than the 16.5% y/y print in June, although m/m inflation fell from 1.71% to 1.25% in July. In fact, monthly increase in prices is at the lowest level since January, suggesting a slight easing of inflationary pressures in the country. In line with the trend in Headline m/m inflation, m/m inflation in the Core Index and Food Index slowed to 1.22% (June: 1.83%) and 1.21% (June: 1.43%) respectively. Likewise, both Rural (1.1%) and Urban (1.3%) indices grew at a slower pace between June and July. Notwithstanding, naira depreciation during the month in both official (average of NGN298/USD compared to NGN233/USD in June) and parallel markets (average of NGN365/USD compared to NGN353/USD in June) continued to weigh negatively on prices. Core inflation rose to 16.9% y/y (June: 16.2%) whilst Food inflation rose from 15.3% to 15.8% in July on the back of a 20.5% y/y rise in Imported Food inflation (June: 20%).

Whilst July data indicates a deceleration in monthly inflation, existing FX challenges – in spite of the new floating regime implemented at the end of June – may put a floor on inflation. In particular, dollar accessibility for importers of diesel and HHK products remains limited, sustaining upwards pressure on energy prices. Furthermore, the naira has weakened substantially in August (average Interbank NGN316/USD) with rates on the parallel market breaching the 400 threshold and averaging NGN397/USD during the month. Finally, it is unlikely that the 200bps increase in the monetary policy rate (MPR) in July had any substantial effect on inflation due to limited monetary policy transmission to cost-push inflationary drivers. Given all this, we have adjusted our inflation estimate for August to 17.7% and our 2016 average estimate to 15.5% (Previous: 15.3%).