Food Prices Push Headline Inflation Northwards

The National Bureau of Statistics (NBS) released the inflation report for January 2017 during the week with Headline Inflation trending further northwards, although prices grew slower Month-on-Month (M-o-M). The Consumer Price Index (CPI) rose 18.7% Y-o-Y in January (in line with Afrinvest’s projection), 17bps higher than 18.6% recorded in December 2016 largely due to pressures from the uptrend in food prices. On a M-o-M basis, increase in price levels slowed to 1.0% from 1.1% in December 2016.

The Food Sub-index rose 17.8% Y-o-Y, up 43bps from 17.4% recorded in December 2016 as a result of the increase in prices of bread, cereal, meat, fish, potatoes and other tubers. M-o-M rate dropped slightly by 4bps to 1.3% relative to December as the pass-through from weaker exchange rate continued to reflect on food prices. This was reflected in Imported Food inflation which inched higher to 22.4% Y-o-Y in January from 21.1% in December. Interestingly, Core Inflation moderated for the second consecutive month to 17.9% in January from 18.1% in December. The moderation mainly reflects high-base effect as Core prices rose faster M-o-M (0.7% vs. 0.6% in December) due to a surge in prices of cooking gas, diesel (AGO) and kerosene (DPK) during the month. According to data from the NBS, average price of kerosene/litre jumped 81.1% M-o-M and 93.2% Y-o-Y to N433.84 whilst average price of diesel/litre rose 22.6% M-o-M and 50.1% Y-o-Y to N240.52 in January. Similarly, average price of cooking gas/5kg cylinder increased 28.2% M-o-M and 39.4% Y-o-Y to N2,567.56 from N2,002.12. We believe the difficulties encountered by petroleum marketers in accessing FX for imports and hike in global hub prices for Liquefied Petroleum Gas (LPG) are responsible for the spike in fuel and gas prices.

The NNPC has however announced that it will tackle hike in prices of kerosene and diesel due to scarcity by “…immediate importation of three additional Automotive Gas Oil (AGO) cargoes before the end of February; and an order for massive 250 trucks per day loading of AGO and DPK, from across the three NNPC refineries in Port Harcourt, Kaduna and Warri.”

If the statement from the NNPC is backed by action, we expect an improvement in supplies and drop in prices of these products towards the end of Q1:2017. However, if the fragmentation and liquidity challenges in the FX market linger and the Naira is further devalued as anticipated in the near term, energy and imported food prices would further be pressured during the year. Regardless, our near term outlook for Inflation rate remains benign as high-base-effect fully kicks in from February. Hence, we expect a more accommodative monetary policy by H2:2017.

In the investment space, our asset allocation strategy for 2017 remains biased for fixed income securities, with preference for short-dated T-bills and long duration bonds. Companies with low FX-based cost with the ability to withstand inflationary pressures on margins or FX denominated cash flow also represent good investment prospect from an equity perspective.