CPI Report: Sustained Moderation in Inflation across the Board

The Consumer Price Index Report for July 2019 revealed a further moderation in headline inflation rate to 11.1% Y-o-Y from 11.2% Y-o-Y in June 2019. The moderation can be attributed mainly to a high base effect and slower M-o-M inflation of 1.0% compared with 1.1% in the previous month. Across the major sub-indices, there was a broad-based slowdown. Food inflation slowed to 13.4% Y-o-Y from 13.6% in June 2019, reflecting a high base effect and slow increases in consumer prices M-o-M at 1.3% from 1.4% in the preceding month. Similarly, the downtrend in core inflation continued at 8.8% Y-o-Y in July, lower by 4bps relative to the previous month. This was driven by a moderation in M-o-M core inflation to 0.8% from 0.9% in the prior month. We suspect that the slower increase in consumer prices was largely underpinned by lower food prices due to early harvests. However, there was a strong increase in imported food inflation to 16.4% Y-o-Y from 15.8% in the previous month, which we attribute to a weak base effect as the M-o-M increase in the index was little changed at 1.26%.

We expect the downtrend in inflation to be sustained as we move further into the harvest season in the coming months. However, we believe the impact would be moderate given persistent security challenges in food producing regions. Accordingly, the sticky nature of food inflation would continue to make the headline inflation target of 9.0% unreachable in the near-term. In addition, we believe the implementation of the FX restrictions on food imports being mulled by the CBN and the FG would impose further inflationary pressures. The major downside risks to inflation remain insecurity, a weakened currency and an upward review of energy prices.
We do not expect any reaction to the inflation data in the equities and fixed income markets as the trend is in line with market expectations. Meanwhile, single-digit core inflation and the downtrend in headline inflation provide continued comfort to the CBN’s easing stance in a tightening cycle, especially as interest rates are reducing globally.