Inflation Moderates Despite Energy Price Pressure

The National Bureau of Statistics (NBS) published Consumer Price Index (CPI) data for Dec-2017 recently with the report surprisingly showing an 11th consecutive monthly decline in Y-o-Y Headline Inflation which moderated 53bps from 15.9% in November 2017 to a 20-month low of 15.37% Y-o-Y in December. Energy price data – PMS, Diesel and Kerosene – published yesterday by the NBS had shown a spike in prices in December due to scarcity of PMS (up 17.1% Y-o-Y and 18.0% M-o-M) and increase in prices of deregulated products such as Diesel (up 4.9% Y-o-Y and 3.3% M-o-M) - attributable to feedback effect of rising oil prices on petroleum products prices. Yet, Headline Inflation continued its descent, majorly driven by slower Month on Month (M-o-M) price growth across most COICOP (Classification of Individual Consumption by Purpose) divisions which offset the energy price pressure, culminating in the slowest M-o-M CPI growth in 26 months.

Year-long Core CPI Moderation Extends to December as Seasonality Factor Drives Food Inflation Lower
Similar to the Headline Index, the year-long decline in Core Inflation (all items less volatile farm produce) extended to December as both M-o-M and Y-o-Y Core CPI growths were at 26- and 22-month lows of 0.51% and 12.09% respectively. Core CPI Y-o-Y growth decelerated 12bps relative to 12.20% in Nov-2017 while the M-o-M measure fell 26bps in the same period. Energy items – fuel & lubricants, solid & liquid fuel – expectedly recorded the highest increases in the Core index. With main season harvest concluding across the country, increase in food stock continues to place a downward pressure on prices of staples with M-o-M Food CPI (farm produce and processed food) growth falling to a 26-month low of 0.6% to mark the fourth consecutive sub-1.0% M-o-M change. Consequently, Y-o-Y Food Inflation declined 88bps to 19.42% (from 20.30% in Nov-2017). Highest increases were recorded in Bread & Cereals, Potatoes, Yams & Other Tubers and Coffee, Tea & Cocoa.

Inflation Outlook Benign on Seasonality Factor and Delay in Supply-Side Reforms
Our near term inflation outlook remains benign as seasonality factor continues to place near term downward pressure on staple food prices. According to Famine Early Warning Systems Network (FEWSNET), the USAID funded provider of early warning and analysis on food insecurity, favourable main season harvest which is underway has improved food access and led to decline in some staple food prices, though higher relative to previous year. In addition, delay in supply side reforms in regulated segment of the energy market (PMS Price and power tariff), though with downside risks of frequent scarcity and price volatility, would constitute less pressure on general price levels than regulatory hikes in power tariff and PMS Price. Hence, we forecast headline inflation to moderate 32bps in Jan-2018 to 15.0% due to below trend M-o-M low CPI growth and high base effect.

In the fixed income market, we remain moderately bullish on local currency bonds as declining inflationary pressures continue to anchor policy rate expectation lower while fiscal strategy to source for cheaper debt reduce FGN crowding-out effect on local debt market.