Inflation Surprises as Base Effect Pushes 22-Month Low

In line with consensus expectation, the Consumer Price Index (CPI) data published on Wednesday by the National Bureau of Statistics (NBS) revealed Headline Inflation declined for the 13th consecutive month to a 22-month low of 14.3% Y-o-Y in Feb-2018 from 15.1% in Jan-2018. This was a positive surprise as the actual reading for the period was 28bps and 47bps below relatively conservative Consensus and Afrinvest Research forecasts of 14.6% and 14.8% respectively. However, as with recent trend, the marked 80bps moderation in Headline Inflation is significantly attributable to the high base against which current prices are being compared, as CPI growth, measured Month on Month (M-o-M), moderated by a rather subtle 1bps to 79bps in February from 80bps in January.

Core and Food Inflation at Record Lows on High Base Effect
Despite an uptick in M-o-M Core index growth (to 0.8% from 0.7% in Jan-2018), Core Inflation (all items less farm produce) measured Y-o-Y fell 40bps from 12.1% in Jan-2018 to 11.7%, the lowest level since Feb-2016, against the backdrop of a high base effect. Similarly, Y-o-Y Food Inflation slowed 133bps to 17.59% from 18.92% in Jan-2018 due to high base effect as well as a surprising marginal decline in M-o-M Food price growth to 0.85% from 0.87% in Jan-2018. Surprisingly favourable post-harvest food price development in 2018 is in stark contrast to the unprecedented food price shock witnessed between Q1 – Q3:2017 which took Food Inflation to a record high of 20.3% in September 2017.

We believe strong Crop Production in Q4:2017 (+4.2% vs 3.1% in Q3:2017 and +4.0% in Q4:2016) is possibly putting a downward pressure on prices and a major factor of the disinflation trend observed in both the Food Index and broader CPI. This account is supported by FEWSNET (Famine Early Warning Systems Network) which noted in its Feb-2018 Nigeria Market Monitoring bulletin that, “Markets remain well supplied during the post-harvest periods with major cereal staples across the country and household stocks high. Traders are currently replenishing their stocks as prices are either stable or declining across several markets relative to previous months”.

Accommodative Monetary Policy More Compelling on Benign Near-Term Inflation Outlook
Our near-term inflation outlook remains benign due to high base effect as well as the broadly positive outlook on underling factor drivers of inflation (FX rate & liquidity and post-harvest food price development). Major downside risks to the positive near-term outlook include supply chain constraints in the downstream oil & gas sector causing recurring scarcity of products, increase in excise duties by the federal government on alcohol and tobacco as well as possible spike in demand for local farm produces from neighbouring countries as the Sahel region approaches off-harvest season. Yet, we expect the disinflation trend to continue in the near term, estimating a further moderation in Y-o-Y inflation to 13.4% in March and revising year  end forecast to 11.2% from 12.3%.

The benign Inflation picture, coupled with strengthening external sector variables (widening trade surplus, rising reserves and stable oil prices and FX rate) and fiscal strategy to reduce debt servicing cost will continue to make the case for accommodative monetary policy more compelling and place a downward pressure on short and long term market rates. The Central Bank entered a policy easing mode in mid-2017 when it began guiding short term rates downward in the fixed income market, without altering its main policy rate (the Monetary Policy Rate - MPR) to signal full commitment to monetary easing. Latest monetary aggregate data also shows policy environment remains tight as Money Supply and Private Sector Credit both contracted M-o-M in January-2018.  Despite downside risk of policy normalization by advanced central banks, we think the CBN will continue to guide short term markets rate downward to stimulate private sector and support non-oil sector growth.