Inflation Races to 8%, Driven by Food Factor

Although both food and core inflation are exhibiting the fastest m/m increases seen since January, the impact of earlier foreign exchange weakness appears not to have been as pronounced as we expected.  All said, inflationary pressures are still relatively benign.
Nonetheless, there is evidence of upward pressure on prices.  The increase in the CPI index seen in every month since March is a touch higher than the average for those months using the index rebased to 2009.  This does not signal an alarming degree of price pressure – it merely indicates that the trend in the coming months is more likely to be higher, rather than lower inflation. 
Market conditions remain liquid.  Overnight rates continue to hover near the lower end of the corridor.  The FX rate has exhibited signs of pressure despite gains in the oil price related to events in Iraq. For now, local factors appear to matter more. 
Given this, we remain wary of inflation risks. The rise in the oil price does not provide sufficient reassurance that Nigerian inflation will remain low and well-behaved.  The amount of pre-election spending remains the key factor to watch.  Should market conditions exhibit signs of even greater liquidity growth, there may be a case for more CBN tightening in response. 
We expect inflation to continue to rise in the coming months.  Given the low base – y/y CPI was in single digits for all of 2013 helped by CBN tightening and favourable food price trends domestically – the risk is that we see a breach of 10% before the year-end.
 Source: Razia Khan, Regional Head of Research, Africa Global Research, Standard Chartered Bank

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