Friday, July 20, 2012 11:27 AM / DLM Research

Moderate increase in headline inflation. Nigeria’s inflation rate inched upwards to 12.90 percent y/y in June 2012 (fig. 1). This was 20 bps higher than the 12.70 percent recorded in the previous month. The moderate increase was partly attributed to the persistent increase in the prices of some farm produce such as yam tubers as well as the increase in the electricity tariff. Other notable increases were observed in the cost of some other recreation and sporting services, catering services, and miscellaneous services However, we note that the effect of the large increase in the electricity index and aforementioned services to the overall index is minimal given their relatively smaller weights in the index. The monthly composite CPI was higher by 1.15 percent in June 2012 when compared with May 2012 (fig. 2). The food index captured by “farm produce and processed foods” was higher y/y by 12.0 percent and increased by 0.5 per cent on m/m basis. The rise in the food index was mainly from increase in the prices of some cereals, meat, fish, cooking oils and tubers. The core inflation index represented by the “All items less farm produce” also rose by 15.2 percent y/y and inched up by 1.0 percent on m/m basis. The increase was partly driven by higher price levels in major classes that compose the index, such as electricity, gas and other fuels amongst other indicators.  
 

Upward trend in headline inflation as expected. The moderate increase in inflation was anticipated as we highlighted that the moderation recorded in May which was 20bps lower than the 12.90 percent recorded in the previous month was not sustainable in view of the increment in electricity tariffs which kicked off in June 2012 amongst other issues (Nigeria: Inflation, May 2012). Given current economic realities, we still maintain that that high inflation levels would persist in the short to medium term with the composite consumer price index expected to peak at c.14.00 percent during the fiscal year.
 

Core inflation remains at record high.... We equally note that the core inflation for June stood at 15.2 percent, 30 bps higher than the 14.90 percent recorded in the previous month. Meanwhile, we equally observed that the current core inflation index is the highest recorded since March 2009. This figure raises significant concerns as the index exclude “farm produce” which is more volatile. Meanwhile, we note that real rate in the economy remains positive given that average yields on government bonds and treasuries are ahead of inflation by c. 280 and 130bps respectively. (fig. 3)

Against the backdrop of inflationary threats, we are conscious of the fact that monetary authorities may maintain the benchmark rate at the current level. However, ahead of the meeting of the MPC this month, we still maintain our position on gradual reduction of the benchmark rate to single-digit levels. Our position is informed by the need to grow the domestic bond market, increase production, provide appropriately-priced long term financing to the real sector, strengthen the Naira and place the economy on a path to sustainable growth amongst other issues.

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