The Consumer Price Index (CPI) report for July 2018 showed a further moderation in headline inflation to a 30-month low of 11.1% Y-o-Y (June 2018: 11.2 per cent), firmly in line with our expectations. On an equally positive note, M-o-M inflation eased to 1.1 per cent (June 2018: 1.2 per cent), reversing the trends seen in May and June 2018. However, monthly inflation is still elevated when compared with the average of 0.8 per cent recorded in the first five months of the year.
Overall, Afrinvest said, the deceleration in Y-o-Y and M-o-M inflation reflected a broad-based slowdown in price increases across major categories. This was notable in sub-indices such as food inflation – which constitutes 50.0 per cent of the CPI basket – and in the core-sub index which removes the seasonal volatility of agriculture prices.
Food Inflation Receives Boost from early Food Harvests
Food inflation declined 13bps Y-o-Y to 12.9 per cent in July 2018, the lowest since March 2016. This was due to tapering monthly inflation at 1.4 per cent (June 2018: 1.6 per cent). We believe the moderation may be connected to a boost in food supply from early harvests of maize in the southern part of the country. In a similar vein, core inflation (all items less volatile farm produce) declined 20bps to 10.2 per cent Y-o-Y in July (June 2018: 10.4 per cent) while the M-o-M inflation moderated 22bps to 0.8 per cent (June 2018: 1.0 per cent). The reduction in core inflation reflected mild price declines in utilities (rent, energy prices, water) and stability in transport prices.
Single-Digit Inflation in 2018 Unlikely on Elevated Demand Pressures in H2:2018
Our near-term outlook for inflation is slightly negative, given abundant risk factors that could upset current momentum in H2: 2018. These include higher inflationary pressures from election spending, budget releases for Capex, and a likely upward revision to the national minimum wage – although the timeline for this is unclear. Also noteworthy is the fact that base effects which supported disinflation in H1:2018 have faded. On a positive note, the food harvest season which fully begins in August and extends into Q4: 2018 would ease pressure on prices. However, we are cautious of the potential impact given downside risks to buoyant crop harvests such as flooding and the herdsmen-farmers conflict which has destroyed farmlands in the middle-belt region. Consequently, we expect headline inflation to continue to moderate in Q3:2018, before slightly rising in Q4:2018 – indicating the third consecutive year of double-digit inflation.
In the markets, we expect a muted reaction to this data release as inflation expectation guides investors’ decisions. Looking ahead, sentiments in the fixed income market will continue to be driven by a combination of factors such as CBN’s liquidity management, the Federal Government’s debt strategy, rising domestic political risk, and risks in emerging and frontier markets.