Nigeria’s shock Feb CPI Numbers

19 March 2012, Sweetcrude, Lagos – NGN – Contrary to expectations that Feb CPI would see a further increase in y/y terms, from the 12.6% y/y recorded in January, the release of Feb inflation data actually points to a DECELERATION in y/y inflation to 11.9%. This will come as a huge surprise to the market and no doubt lead to much focus as to what was behind the outcome.

– Overall view – relative to the market – was that inflation was always likely to peak at a much lower level than the 15-17% range suggested by some following the partial lifting of the fuel subsidy. There were a number of reasons for this.

– The increase in fuel prices no doubt had a contractionary impact on real disposable income. In some sectors, a slowdown in momentum had been evident for some time, so pricing power – the key ingredient needed to see a translation into any meaningful secondary impact, was largely missing.

– Much of the aggressive tightening that we had seen from the CBN over the course of last year is still feeding its way through the real economy. In fact, earlier information from the NBS suggests that had it not been for the impact of the fuel subsidy reforms, CPI may have been expected to decelerated to 9-10% y/y in the early months of the year

– Overall money supply trends remain reasonably benign – in part because of continued OMOs by the CBN, and, in terms of broad money – the structural difficulties involved in scaling up real sector lending considerably. This is not something that can change dramatically overnight.

– Recent FX appreciation on the interbank market might have been expected to provide a positive influence – an additional dimension to the tightening. However, it would be curious is this were feeding into the Feb inflation print in a big way. The full impact is likely to take longer to feed through.

– The rather curious nature of the fuel subsidy removal which appears almost counter-intutitive. Close examination of each component of the CPI suggests that we were not seeing anything like the maximum amount of pressure on inflation of that component around the time of the fuel subsidy adjustment. In the case of each component of CPI – without exception – the maximum pressure – measured as the largest increase in the underlying index since Jan 2008 – had been seen at some point previously. We shouldn’t therefore be wholly surprised by the Feb inflation print. The data suggests that for each component of CPI, Nigeria had actually seen worse ‘inflation’ in that component at some point in the past. The worst pressure did not necessarily stem from the fuel subsidy removal.

– Inflation is still rising, but more gradually than most people would have expected. Core inflation is up 1.5% m/m in Feb. This should not be shrugged off, especially given expectations of further cost-push pressures with tariff and duty adjustments to come through later in the year. On a 12 month basis, the measure that matters to the CBN right now, inflation also rises moderately – to 11% y/y from 10.9% y/y in Jan. Still, at these levels, real interest rates are positive, and this reinforces our view that there will be little need to adjust interest rates just yet, despite the potential passage of a more expansionary budget (with spending raised to NGN 4.88trn).

About the Author