Executive Summary
In our H1 18 strategy report, we projected a drop-in headline inflation, anchored on the blend of soft domestic food prices and base-effects (H1 17) with the scale of moderation trimmed by higher transport inflation – hinged on rising crude oil prices. Indeed, our view of a downturn in consumer prices panned out with headline inflation declining by 285bps over H1 18 to average 13.02% year-on-year (YoY).
However, the scale of moderation was steeper than what we had envisaged, as NNPC stepped up its fuel imports over the period to support market supply and price – at N145/litre. Consequently, core inflation dipped 101bps to average 11.17% YoY over H2 17 while food inflation declined markedly by 451bps over the review period to 15.63% YoY with the sharp decrease resulting from the impact of favorable base effect and increased market supplies.
In terms of our outlook over the second half of the year, we considered currency and liquidity concerns over the rest of the year. On the currency front, we believe increased interventions from the CBN will keep the Naira stable in H2 18. With regard to liquidity, particularly from the implementation of the approved 2018 budget (N9.12 trillion) and, most importantly, spending against the 2019 elections, we do not envisage any price pressure, taking a cue from precedents which shows muted pressures over H2 18 as well as in the months leading up to elections.
Overall, our analysis suggests that while base effects although minimal would drive lower CPI, structural bottlenecks from elevated transportation costs should limit scale of moderation in inflation. Summing up developments across both core and food inflation sub-components, we project mean headline inflation to hover around 12.04% YoY over 2018 (2017: 16.55%).
Headline inflation nose-dives over H1 2018, hits 28-month low
In our H1 18 strategy report, we projected a drop-in headline inflation with downside curtailed by elevated transport inflation. Precisely, our expectation of softer inflation was anchored on the blend of soft domestic food prices and base-effects (H1 17) with the scale of moderation trimmed by higher transport inflation, hinged on higher crude oil prices.
Indeed, our view of a downturn in consumer prices panned out with headline inflation declining by 285bps over H1 18 to average 13.02% year-on-year (YoY). However, the scale of moderation was steeper than what we had envisaged. To be precise, due to rising crude oil prices, we had expected independent marketers’ inability to import fuel to give rise to episodes of fuel scarcity which would pressure PMS price.
However, in a bid to boost supply, NNPC stepped up its fuel imports over the period thus supporting price at regulated level of N145/litre. Consequently, core inflation dipped 101bps to average 11.17% YoY over H2 17 with the decline stemming from the HWEGF1, education and clothing divisions. In the review period, food inflation declined markedly by 451bps to 15.63% YoY with the sharp decrease resulting from the impact of favorable base effect and increased market supplies.
