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May Inflation Review - Inflation drops, but food price pressure surfaces

Inflation drops, but food price pressure surfaces                                                                            

Nigeria’s inflation came in at 11.6% y/y in May, above Vetiva and Consensus estimates of 11.3% y/y and 11.4% y/y, albeit lower than April inflation of 12.5% y/y. The decline in inflation was primarily driven by a high May 2017 base (m/m inflation: 1.9%) as m/m inflation in May 2018 actually rose to 1.1% from 0.8% in April – the highest m/m inflation since July 2017. Across sub-indices, Core inflation declined slightly y/y – from 10.9% to 10.7%, but rose m/m – from 0.9% to 1.0%, whilst Food Inflation also declined y/y – from 14.8% to 13.4%, – but jumped m/m from 0.9% to 1.3%. Given the rise in m/m inflation, the moderation in annual Core and Food Inflation was as a result of aforementioned base effects.                                                                     

We note that although food inflation was down significantly y/y, it was much higher m/m, with additional pressure primarily coming from domestic food prices. Despite the sharp uptick in m/m food inflation, imported food inflation was little changed at 1.2% m/m. In terms of food prices, we point to the ongoing violence in the Middle Belt and the reported disruption to farming activities as a likely driver. In light of this, we are concerned that the uptick in food price pressure is here to stay and revise our inflation expectations in line with this view.                                                                         

We remain concerned about food prices given the security situation in the Middle Belt. In addition, we are cautious on demand-pull inflation given likely fiscal injections in H2. We point to delayed budget passage (and subsequent frontloaded capital disbursement) and pre-election spending as primary drivers of the expansionary fiscal policy outlook in H2’18 and foresee this and food price pressure becoming more influential as the high 2017 base begins to wane. Based on our view that m/m inflation would be higher in the second half of the year, we raise our June and average inflation forecasts to 11.1% y/y and 12.0% y/y respectively (previous: 10.5% and 11.6%).