February 2019 Inflation: Sustained Moderation in Price Pressures

This week, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) for February 2019. The report shows a surprising slowdown in inflation for the second consecutive month to 11.3% Y-o-Y in February 2019 (January: 11.4%). This is significantly below the analysts’ average estimate of 11.5% reported by Bloomberg. We observe that headline inflation was slower than expected due to lower M-o-M inflation at 0.73% in February (January: 0.74%), the lowest since December 2017. The moderate increase in consumer prices between January and February 2019 reflects the downtrend in core and food inflation on M-o-M basis. We highlight that February’s M-o-M inflation translates to an annual inflation rate of 9.1%, which shows that prices are generally stable. Indeed, inflation has taken a different turn since reaching a seven-month high of 11.4% in December 2018, despite the election period which is usually associated with elevated prices.

Core inflation also followed a similar path, moderating to 9.8% Y-o-Y in February 2019 from 9.9% in the previous month, as prices rose at a slow pace of 0.7% M-o-M (January: 0.8%). Single-digit core inflation is a sign that prices are broadly stable, and it creates the room for monetary easing. In the absence of adjustments to prices of electricity and petrol, we expect core inflation to remain stable.

Food Inflation Still Elevated
Food inflation moderated for the second consecutive month by 0.4ppts to 13.5% Y-o-Y in February 2019, supported by a marginal reduction in M-o-M food inflation to 0.82%.  Despite the positive trend of late, we note that food inflation remains sticky compared with the monthly average of 10.0% in the five years preceding the 2016 economic recession. This is expected as the harvest season which previously supported a moderation in food prices has given way to the planting season. The planting season typically lasts till early June; thus, we expect food inflation to remain elevated through June 2019. This is likely to be worsened by insecurity in the middle-belt and the rest of Northern Nigeria, which remains a persistent drag to agriculture output.

Unconventional Monetary Easing Approach to Continue
Ahead of the second meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) between 25th and 26th March, we believe February inflation numbers should make committee members more comfortable with monetary easing. The political environment is relatively calm, there is more clarity on the direction of the economy and interest rate hikes have been put on hold by the central banks of advanced economies. However, we do not foresee a reduction in the Monetary Policy Rate (MPR), which has been unchanged at 14.0% since July 2016. Instead, monetary easing would reflect the current stance of the CBN in the debt market, where yields have dropped by 0.4% post-elections and primary auctions are now less aggressive.