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Wednesday 16 August 2017

Why Inflation Rate is creeping southwards

By United Capital
Nigeria's headline inflation rate has remained stubbornly high in 2017, down 2.6 percent to 16.1 percent in June-2017 vs. 18.7 percent in Jan-2017. While moderation in y/y inflation rate has been broadly driven by higher base effect, month/month inflation rate has risen consistently from 1.1 percent December 2016 to 1.9 percent in May 2017, averaging 1.6 percent in H1-2017 vs. 1.9 percent in H1-2016. So, why is m/m inflation rate unyielding despite improvement in the currency market?Related image
Core Inflation which isolates the transitory impact of food, energy and farm items has sustained downtrend since Jan-2017, settling at 12.5 percent in June-2017 vs. 21.1 percent in Dec-2016 due to improved forex market condition. Contrariwise, domestic food inflation rose to 19.9 percent in June-2017 vs.17.4 percent in Dec-16. Accordingly, elevated food prices have been the culprit.
Going forward, we think the sustained pressure on m/m inflation will keep the outlook on price level benign as high base effect fizzles out. Although a likely bumper harvest season may ease food prices, we do not see inflation rate below 14 percent by year-end if pressure on m/m inflation continues unabated. In fact, our model estimation suggests inflation may climb higher before December if m/m inflation averages above 1.0 percent in H2-2017. Thus, we project July inflation at 16.0 percent, if m/m inflation falls sharply to 1.1percent

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