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October Inflation Review - Easing food price pressure keeps inflation in check

Easing food price pressure keeps inflation in check                                                          

Nigeria’s October inflation came in at 11.3% y/y, in line with the September figure and Vetiva estimate, but slightly below Consensus projection of 11.4% y/y. However, month-on-month (m/m) inflation came in lower at 0.7% (September: 0.8%). Looking across the sub-sectors, Food Inflation also came in flat at 13.3% y/y after another sharp fall in m/m food inflation to 0.8%—the lowest level in 2018. The contraction in m/m food inflation can be attributed to the harvest season which has eased pressure on domestic food prices. In comparison, imported food inflation was flat at 1.2% m/m. The trend in food prices is a significant positive given the previous acceleration in food prices as a result of conflict-driven disruption to food supply. Less positive is the rise in Core Inflation on both m/m (0.6% to 0.8%) and y/y (9.8% to 9.9%) terms.                                                     

Despite the stickiness in recent inflation figures (six-month average: 11.3% y/y), approaching headwinds dampen our optimism of Nigeria’s pricing environment. Firstly, election spending is expected to exert demand-pull inflation, and members of the Central Bank of Nigeria’s interest rate-setting committee have already expressed concern over excess liquidity heading into the election. In particular, the rise in M3 (a new measure of broad money) above prudential thresholds, which poses a risk to inflation. In addition, a minimum wage hike remains likely and could lead to a wage-price spiral in the economy. Amid all of these, our expectations for the rest of the year are unchanged—11.4% y/y in November and 12.2% y/y average for 2018, but we expect inflation to trend higher in 2019, on the back of the aforementioned factors.