How the ‘Food Factor’ Eased Inflation to 7.7% in February

Inflation rate, the average change in the movement of prices of goods and services reduced further in February following favourable weather conditions that helped better harvest in some agricultural products.
The ‘food factor’ became more pre-dominant as it accounts for 50.7 percent of the entire Consumer Price Index (CPI) basket.
Food inflation declined marginally to 9.2 percent year-on-year (y/y) in February, from 9.3 percent y/y in January and December, and eased to 0.6 percent in month-on-month (m/m) terms, from 0.8 percent and 0.9 percent in the same time frame. The monthly print was also below the average m/m inflation recorded in February over the past few years which appeared to be driven by muted farm produce price pressures.
“Food accounts for 50.7 percent of the CPI basket making Nigerian inflation particularly sensitive to climatic and exogenous factors, although the relatively stable food price dynamics over the past year (in a 9.2 percent-11.0 percent y/y range) suggest this is less of a concern at present”, said Samir Gadio, analyst with Standard Bank, London.
Interestingly, imported food inflation (13.3 percent of the CPI basket) stood at 7.2 percent y/y in February, from 7.0 percent y/y in Jan and 7.1 percent y/y in December, in line with a multi-month stationary path that has probably been supported by a stable exchange rate and contained global food and oil prices.
All items less farm produce inflation rises to 7.2 percent y/y. All items less farm produce inflation reached 7.2 percent y/y in February, from 6.6 percent y/y in Jan and 7.9 percent y/y in Dec, while it stood at 0.5 percent in m/m terms, from 0.2 percent m/m and 0.8 percent m/m, respectively. This means that the m/m CPI figure in this category was moderately below the average monthly inflation print recorded in February since 2009 (0.8 percent), albeit higher than the 0.1% and 0.0% registered in Feb 2012 and Feb 2013. Annual inflation in the most relevant sub-categories actually declined modestly in Feb and remained subdued (utilities [16.7 percent of the CPI basket]: 5.2 percent y/y; clothing and footwear: 7.1 percent y/y; furnishing and equipment maintenance: 6.7 percent y/y; transport: 6.4 percent y/y). Given these metrics, it is likely that the pick-up in annual “all items less farm produce” inflation was the product of an increase in y/y processed food inflation, although the NBS does not report the time series for this sub-group.
Core inflation climbs to 8.0 percent y/y. Our measure of core inflation (“All items less farm produce and energy”) rose to 8.0 percent y/y in February, from 7.0 percent y/y in January and 7.9 percent y/y in December. In m/m terms, it accelerated slightly to 0.9 percent, from -0.1 percent and 0.7 percent over the same period, which again appears to reflect an increase in processed food consumer prices.
Overall, core inflation has remained subdued since early 2013 despite the loose fiscal stance and ample excess liquidity in the financial system, pointing to a low money multiplier in the economy. Additionally, such dynamics have been supported by the resilience of the naira, a still restrictive formal monetary stance and administered prices in a number of sectors.
Inflation falls to 7.7 percent y/y in February Inflation in Nigeria dropped to 7.7 percent y/y in Feb 2014, from 8.0 percent y/y in January and December, which represents a low since at least late 2007. The CPI figure for Feb was also close to our forecast of 7.9 percent y/y, and remained broadly in line with the projected medium term inflation path. In m/m terms, consumer prices increased 0.5% – below the average monthly inflation levels typically recorded in Feb in recent years – and extended the benign 0.3.-0.8 percent m/m range that has prevailed since early 2013.
Gadio said single-digit inflation to persist. “Based on the current m/m trend, our projections suggest that inflation will remain in single digits in the medium term and may well stabilise with a seven percent handle in first half of 2014 (7.5 percent y/y in March), before edging up moderately in first half of 2014. The upside risks to this outlook stem from a potential readjustment of the mid-point (N155) of the Retail Dutch Auction System (RDAS) foreign exchange band coupled with a move higher in interbank N164.8/$ on 14 March) and a new leg of fiscal expansion ahead of the 2015 elections, as well as a less likely shift towards a more accommodative monetary stance”, said Gadio.

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