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Nigeria Inflation: Trends & Expectation

Headline Inflation in December rose to 18.6% y/y (November: 18.5% y/y) amidst a sharper rise in month-on-month (m/m) inflation to 1.1% (November: 0.8%). This was ahead of both Vetiva estimate and Bloomberg Consensus (both 18.4%). The main culprit for the month was Food Inflation which registered at 17.4% y/y and 1.3% m/m (the highest since June), compared to 17.2% y/y and 0.9% m/m in November. In contrast, Core Inflation actually declined marginally to 18.1% (November: 18.2%) for the first time since October 2015, as m/m inflation moderated to 0.6% (November: 0.7%).

Nigeria's inflation surged during 2016. A number of regulatory decisions taken early in the year helped propel this surge. Specifically, an upward revision in the retail price of Premium Motor Spirit (PMS) in May followed hot on the heels of a 45% hike in national electricity tariffs in February. Furthermore, the evolution of the foreign exchange (FX) market played a significant role. The rationing of dollars in the official market, done in a bid to defend the currency, drove demand to the more expensive parallel market while also pushing up the price of local alternatives to imported goods. As such, imported inflation rose despite a fixed currency. Subsequently, the “float” of the naira in June precipitated a sharp devaluation, leading to the currency eventually losing over a third of its value by the end of the year.

Our base scenario accounts for some currency depreciation during the year. Coupled with higher oil prices, we expect relatively strong inflationary pressures. But these will be countered by base effects to bring average inflation down to 13.4% in 2017, with January registering at 18.4%. It is also important to note our bearish scenario for inflation which assumes a large devaluation of the naira. We project that this would induce similar inflation to 2016, with average inflation reaching 15.5% over the course of the year. Neither case is particularly appealing and we highlight that 2017 will be an inflationary year and call for strong fiscal policy response to support real incomes.