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Headline Inflation Continues to Ease

Headline Inflation Continues to Ease

The National Bureau of Statistics (NBS) reported today that the consumer price index (CPI) continued to decline for the seventh consecutive month in August 2017, easing by 0.04 percent points to 16.01 percent year on year (vs 16.05 percent recorded in July). This in line with our expectation that inflation would remain within the 16 percent band in our previous July inflation report. The National Bureau of Statistics (NBS) report suggests that increases were recorded in all COICOP (Classification of Individual Consumption by Purpose) divisions that contributes to the headline index. 

Data shows that the Headline index on a month-on-month basis inched up by 0.97 percent in August, 0.24 percent points lower than the 1.21 percent month-on-month increase in July.  The urban index inched northwards to 16.13 percent year-on-year in August, 0.09 percent points higher than the 16.04 percent recorded in July, while the rural index declined from July’s 16.08 percent to 15.91 percent in August by 0.17 percentage points. Pressure on headline inflation was exerted by food prices, with highest prices recorded in coffee, tea, cocoa, meat, oil & fats, bread & cereals, vegetables, milk, cheese, egg and fish.

Inflation rate 

Core Sub-Index Inches Upward.

The Core sub index (All Items Less Farm Produce) which excludes volatile agricultural prices inched upward albeit slightly on a year-on-year basis by 0.10 percentage points. It rose to 12.30 in August percent from 12.20 percent recorded in the preceding month of July. The index however eased on a month-on-month basis to 0.93 percent in August, 0.07 percent points lower than the 1.00 percent increase recorded in July. Prices recorded in passenger transport by air, motorcycles, furniture and clothing materials as well as books and stationary, pharmaceutical products and shoes exerted pressure on the Core sub-index.

 Food Sub-Index eases to 20.25 percent

The food sub-index deviated from its upward trend in the month of August as it declined marginally by 0.03 percent from July’s 20.28 percent to 20.25 percent. The food price pressure was spurred mainly by increase in prices of meat, fish, oil and fats, coffee, tea, cocoa, bread and cereal, milk, cheese, egg and vegetables. The food price index also declined on a month-on-month basis, declining by 0.38 percentage points from 1.52 percent in July to 1.14 percent in the month of August.

Implications

The continuous easing of inflationary pressure is consistent with the marginal expansion in GDP recorded in second quarter of 2017 which has been supported by other variables including improved foreign exchange access for manufacturers and traders and increased foreign capital importation aided by the CBN’s NAFEX window, capital spending and improved foreign currency reserves boosted by increased oil export earnings. With the harvest season kicking in, we expect inflationary pressure on consumer spending to ease due to decline in food prices.

In the investment environment, we do not expect any major alteration in investment patterns. In the equities market, we do not expect any major alteration with investor sentiments starting to cool off as investors have been somewhat bearish following the bullish run supported by improved company earnings released during the earnings season as well as improved economic fundamentals. The fixed income space is still remains a sweet spot for risk averse investors due to High yields on the assets.

Outlook for Inflation

We expect the trend of modest easing of inflationary pressure to continue over the coming months through November due to the factors earlier discussed including the harvest season kicking in to soften food price pressure. We expect inflation to fall marginally below the 16 percent line to between 15.95 and 15.98 percent in September.

 

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