Following the release of the July 2014 Inflation data by the National Bureau of Statistics (NBS), we provide below our thoughts:
Headline inflation rises marginally, hits 12-month high of 8.3% YoY…
Inflation in July rose to 8.3 percent YoY (June: 8.0% YoY), fuelled by higher food prices as the food index rose by 9.9 percent YoY (June: 9.8%), notwithstanding a significant moderation in core inflation to 7.1 percent YoY from 8.1 percent YoY in June.
July’s inflation rate raises YtD average inflation rate to 7.99 percent YoY (June: 7.93% YoY), which is still more benign than the 8.90 percent YoY recorded over the same period in 2013. On a monthly basis, inflation rose 0.65 percent – a marginally slower growth compared with the 0.77 percent recorded in June, although monthly prices are higher than July 2013 (0.54% MoM).
Since the decline in headline inflation in January, this is the fifth consecutive month of year-on-year increases in the headline index. Core inflation fell to a four-month low of 7.1 percent YoY, while food inflation peaked at a 12-month high of 9.9 percent YoY.
Lower imported food prices cushion food inflation
Since hitting a 15-month high of 8.8 percent YoY in May, imported food inflation moderated for the second consecutive month to 8.1 percent YoY and 0.39 percent MoM, providing a cushion for food inflation.
Incidentally, the moderation that has been observed in imported food inflation coincides with the resumption of Godwin Emefiele as the governor of the Central Bank of Nigeria.
Considering the slower growth in imported food inflation, we suspect the firmness in YoY and MoM food inflation to 9.9 percent (June: 9.7%) and 0.8 percent (June: 0.8%), respectively, was driven by higher prices of domestic farm produce as the NBS reports increases in prices of fruits, vegetables, potatoes, yam and other tubers.
This uptrend in domestic food prices is consistent with the July trend for inflation, reflecting the impact of lower activities and increased demand over the Ramadan season.
Core inflation moderates sharply to a 4-month low
As was the case with food inflation, we think core inflation benefited from the moderation in imported food prices, as it dropped to a four month low of 7.1 percent YoY with the MoM print at a six-month low of 0.2 percent.
As was the case in June, the Housing, Water, Electricity and other fuel (our proxy for the Utilities Index which constitutes 16.7% of the CPI) was the major driver of core inflation. The Utilities Index rose to 5.89 percent YoY in July, driven by higher electricity prices (a reflection of the implementation of electricity tariff increases according to the revised Multi-Year Tariff Order framework which took effect in June).
Looking ahead, what to expect?
We welcome the surprise drop in core inflation, though we are not quick to view the softening in core inflation as an indication of what to expect going forward. We look forward to subsequent inflation reports to confirm a reversal in core inflation. We retain our 2014 average inflation estimate of 8.3 percent YoY.
As we have reiterated in our previous releases, one of the major risk to inflation stems from unfavourable exchange rate pass through. While the recent accretion in foreign reserves to $39.6 billion (+3.04% since the release of June’s inflation figures) is relatively comforting, we think the commencement of the electoral cycle in October and recent softening in crude oil prices (Bonny Light at $102.1/bbl) could serve as triggers for another bout of volatility in the FX markets with significant implications for inflation.
