September 2018 Inflation Update- The Reversal Continues

October 20, 2018/InvestmentOne Report

· Earlier this week, the National Bureau of Statistics (NBS) released the Inflation report for the month of September 2018, which showed a rise in headline inflation to 11.28% year on year (y/y) in September 2018, from 11.23% y/y in August 2018.

· We highlight that for the second month running, we have recorded a faster increase in Consumer Prices following eighteen months of disinflation on the back of the high base in H1 2017.

· However, the headline inflation slowed down month on month (m/m) to 0.84% in September 2018 from 1.05% in August 2018. This was reflective of the slowdowns recorded in m/m Food and Core sub-indexes (to 1.00% and 0.64% in September 2018 from 1.42% and 0.78% in August 2018 respectively).

· In our view, the rise in y/y change in the Food-Sub index (13.31% in September 2018 vs 13.16% in August 2018) may have been responsible for the marginal rise in y/y headline inflation.

· We highlight that the slow growth in Agriculture output, according to NBS’ GDP report for Q2 2018 (1.19% y/y), could be a negative for food supply which could be worsened by insecurity and flooding in some key food producing states in the country. These factors could hinder the positive impact of the harvest season, thus putting upward pressure on food prices.

· On the other hand, the statement released by NNPC, that landing cost of the Premium Motor Spirit (petrol) being imported into the country has risen to at least N205 per litre on the back of the recent increase in global oil prices, may put more pressure for PMS price to increase in the near term. Nonetheless, we expect government to maintain the official PMS price at N145 per litre due to the effect any price increase may have on the current administration’s re-election bid in 2019.

· As a result of the potential increase in money supply and inflationary pressures, we could see the Monetary Policy Committee (MPC) tightening its stance in Q4 2018 by increasing the frequency of its Open Market Operations (OMO auctions) with the potential of selling these bills at higher stop rates. This could help to fight against inflation though it could also be a negative for economic growth in the near term.


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