The Consumer Price Index (CPI) data for January 2018 released by the National Bureau of Statistics showed that inflation moderated for the 12th consecutive month at a 21-month low of 15.1 per cent year on year Y-o-Y, from 15.4 per cent Y-o-Y in December 2017. The 24bps decline in inflation was however mainly driven by high base effect as mouth on month M-o-M, headline index price growth accelerated 21bps M-o-M to 0.8 per cent from 0.6 per cent in December 2017 against the backdrop of increases in Food and Core Indices M-o-M growths.
According to Afrinvest the increase in M-o-M food inflation reflects seasonal rise in food prices associated with the end of main season harvest particularly in the Southern part of the country) whilst Core Inflation pressures were driven by noticeable spikes in Utilities segment (Housing Water, Electricity, Gas and Other Fuel).
Core Inflation which tracks movements in prices of all items less farm produce stayed flat Y-o-Y in January at 12.1 per cent due to pressures on energy prices which drove the Index M-o-M growth to 0.7 per cent, 17bps higher than 0.5 per cent in December. The highest increases in the month were recorded in fuel and lubricants for personal transport equipment, vehicle parts, accommodation and products for personal care, hotels and restaurants. As main season harvest gradually comes to a close, and with the beginning of planting season, Food Inflation (farm produce and processed food) measured M-o-M rose 29bps to 0.9 per cent in January; yet, the Index Y-o-Y measure declined 50bps to 18.9% mainly due to high base effect. The highest increases were recorded in Bread & Cereal, Vegetables, Meat, Potatoes, Yams & Other tubers.
Afrinvest in a note to investors said “Our near-term inflation outlook remains benign despite the end of favourable food harvest season – with anticipated negative feedback on food prices going forward – as well as supply-side constraint in fuel distribution. As shown in latest CPI reports, the impact of rising fuel prices is still isolated within Utilities division while robust FX liquidity environment will, to a large extent, be favourable for other Core items.
Furthermore, we expect M-o-M Food price growth in 2018 planting season to be below 2017 level due to reported above-average harvests in most areas; however, increasing pastoralists-farmers conflict in the agricultural belt and dry season demand for locally produced grains from neighbouring countries are downside risks to watch out for.
“On a balance of factors, we expect Headline Inflation to further moderate to 14.8% in February and retain our year-end target of 12.3%. In the short term, we expect the positive price-level development in January to have a muted impact in the fixed income market as tightening global liquidity will likely offset near term downward pressure on inflation anchoring yield expectation lower”.
