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March Inflation Review - Inflation outstrips expectations as pricing pressures weigh

​Inflation outstrips expectations as pricing pressures weigh
March Inflation came in way ahead of Vetiva estimate (16.6%) and Bloomberg Consensus (16.7%), logging 17.3% year-on-year (y/y) as pricing pressures remained unexpectedly strong. We rightfully expected y/y inflation to moderate from February 2017 level (17.8%) as base effects weigh on the estimate but the drop was lower than expected because month-on-month (m/m) inflation accelerated to a 10-month high of 1.72% (February: 1.49%).

The resilient pricing pressure is present in both sub-Indices. The Core Index rose 1.32% m/m in March but was dragged down by base effects as y/y Core Inflation came in at 15.4% (February: 16.0%). Similarly, the Food Index rose 2.21% m/m in March (February: 1.99%) but y/y Food Inflation still fell – for the first time in 18 months – hitting 18.4% after February’s reading of 18.5%.

It is notable that the primary inflationary drivers from 2016 – currency depreciation and dollar scarcity, as well as increase in petroleum and energy prices – have largely abated. Despite this, inflation continues to rise, largely on the back of food prices. With consumer demand still weak and the Central Bank of Nigeria persisting with liquidity mop ups, pricing pressures are likely to be cost-push and structural, making them more difficult for the Monetary Policy Committee to tackle. Nevertheless, we expect improved liquidity in the foreign exchange market and base effects from April 2016 (13.7% inflation) to drag down inflation. But with pricing pressures evident, we forecast a marginal drop in inflation to 16.9% (previous: 16.0%).