May 2019 CPI Report: Slight Moderation Expected in Headline Inflation

Ahead of the release of May 2019 inflation data next week, we present our expectations. We project a slight moderation in headline inflation to 11.3% Y-o-Y in May from 11.4% due mainly to a high base effect. This is despite an expected uptick in M-o-M inflation to 1.0% in May from 0.94% in the previous month. Our forecast is mainly driven by sustained food price pressures which would drive M-o-M food inflation higher to 1.3% from 1.1% in the previous month. This would leave food inflation marginally lower but broadly unchanged at 13.7% Y-o-Y. The M-o-M increase in food inflation is consistent with historical trends observed during the planting season. We believe insecurity in Northern Nigeria due to insurgency and herder-farmer conflict would continue to pressure agricultural output and in turn prices.

In May 2019, the exchange rate remained stable across all market segments as the CBN continued to intervene through FX sales. In the I&E window, the NAFEX rate marginally appreciated from N360.64/US$1.00 to N360.3/US$1.00 while the parallel market rate saw a slight depreciation to N361.00/US$1.00 from N360.00/US$1.00. We believe price movements is less susceptible to the official exchange rate, given that transactions conducted at this rate are negligible. The movement in exchange rates partly informs our expectation of moderate increases in imported food inflation. Also supportive of our view is the FAO food price index which contracted 1.9% Y-o-Y in May, although this was weaker than in the previous month. We note that the recent adjustment of the exchange rate at which customs duties are computed from N306.00/US$1.00 to N326.00/US$1.00 would lead to further inflationary pressures. However, this will have no impact on May inflation but in subsequent months. Core inflation, which corrects for volatile agricultural prices, is expected to come under pressure in May.