Approaching a slowdown in inflation

The latest report from the NBS shows the eleventh successive acceleration in headline inflation, to 18.6% y/y in December from 18.5% the previous month. The rounding masks an increase of just 7bps. Our expectation, shared with wire service polls of analysts, was 18.4% y/y. Core inflation y/y declined modestly from 18.2% to 18.1%, the first slowdown since November 2015. In contrast, food inflation picked up from 17.2% y/y to 17.4%. The bureau’s commentary notes higher prices for all staples: additionally, imported food inflation remained above 21% y/y.
Among the elements of core inflation, prices of housing, water, electricity, gas and other fuels soared by 27.3% y/y in December. We suspect that fuel prices were again the principal driver.

The interbank exchange rate, administered by the CBN in all but name, has now been stable for four months. If the parallel market was an important source for fx for imported goods and services, as some analysis in the media and elsewhere would suggest, we would not be seeing steady falls in m/m core inflation. Indeed, rises in m/m headline inflation have been slowing from a peak of 2.8% in May to 1.1% in December, when there was a small pick-up on seasonal effects.

From February, inflation is set to fall markedly on positive base effects. This will be balanced to an extent by the FGN’s expansionary fiscal stance and whatever exchange-rate reforms, if any, the authorities choose to launch.


Approaching a slowdown in inflation Sources: National Bureau of Statistics (NBS); FBNQuest Research

The monetary policy committee’s view is that the principal drivers of inflation are structural and supply-side, and therefore beyond its control. We think that it will start to cut its policy rate in line with headline inflation this year.

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