Nigerian CPI print for January as released by the National Bureau of Statistics (NBS) puts January inflation rate at 8.2 percent y/y, a 20bps increase from December estimate. This was much in line with our expectation of an uptick. The increase in inflation was driven by a faster pace of movement in the Core Index (all items less farm produce) which increased by 60bps to 6.8 percent in the period. Food index was however flat y/y at 9.2 percent.
Core index surges by 60bps…
The pace of increases in the Core index, which excludes the prices of volatile agricultural produce picked up in January. Prices rose by 6.8 percent y/y, up from 6.2 percent in December with the strongest increases recorded in the “housing, water, electricity, gas and other fuels” divisions. On a m/m basis, the Core index slowed marginally in January to 0.7 percent from 0.8 percent in December. The highest increases were recorded in the furniture and furnishings; non-durable household goods; clothing materials, and shoes and other footwear groups. The average 12-month annual rate of rise of the index was recorded at 6.9 percent for the 12-month period ending in January 2015, unchanged from the 12-month rate recorded in December. We expect to see a faster growth in the core index in the coming months on the back of the pressure on the naira which is expected to persist; we also see increased political spending as a driver for an uptick in the core index for February and March.
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Food price index stood at 9.2 percent in January, roughly unchanged from December estimates. Price increases are also marginally higher from the 12-month low recorded in November of 2014 at 9.1 percent. On a m/m basis, food prices increased by 0.9 percent in January, increasing at the same pace for the second consecutive month. Price increases slowed for all groups that make up the Food index except for vegetables; the highest price increases were recorded in the vegetables, meat, “potatoes, yams and other tubers,” and “bread and cereal” groups.
The flat growth in the Food index can be ascribed to the spillover effect of the harvest season which pulled into the New Year. The average annual rate of change of the Food index for the 12-month period ending in January 2015 over the previous 12-month average was 9.5 percent; the 12-month rate of change has held steady for eight consecutive months. We expect food prices to shoot up in the coming months as farmers have already commenced land preparation for the 2015 planting season coupled with increase in imported food commodities on the back of the free fall of the naira.
Where are we headed?
Sustained uptick in core index is expected to be a major driver of an increase in inflation in 2015; this is largely due to its vulnerability to exchange rate and financial market liquidity. As we continue to expect a persistent pressure on the naira with the possibility of a further devaluation, we look to see a further uptick in inflation estimates in the coming months even as the macro-economic and political challenges are yet to fully crystallise, in our view. The escalations in insurgency in the Northern part of the country, especially in a post-election scenario, given the recent spread in the geographical reach of the Boko Haram insurgents, is another risk factor. We expect to see the full impact of the last devaluation of the naira from Q1‘15. We forecast an average inflation rate of 10.5 percent in 2015, as we expect core inflation to average 9.5 percent, and food inflation 11.5 percent.
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