FBN Capital: An inflation teaser for the MPC

Headline inflation in July was unchanged at 9.2% y/y. This was our contribution to polls of analysts by the wire services.

The core measure rose from 8.4% y/y in June to 8.8% while food price inflation remained 10.0% y/y.

We again see the impact of the weaker currency on the core measure, showing that importers are passing their higher costs in part onto consumers. The NBS noted strong rises for the transport and education segments of the index.

Imported food prices rose by 0.9% m/m in July after an increase of 1.0% the previous month. This is the only index component composed solely of imports.

Real yields for FGN bonds along the curve are now above 6%. Attractive on the surface within the emerging/frontier world, they will not impress the many offshore investors who expect a third devaluation within one year.

Headline inflation remains above the high point of the CBN/MPC range of between 6% and 9% y/y. This would normally be grounds for monetary tightening, particularly as core inflation has risen for seven successive months.

The MPC communiqué in late July stressed “transient” inflationary factors such as fuel and power shortages yet four of the 12 members nonetheless voted for a policy rate hike. We would not be surprised if the committee opts for tightening when it meets next month.

Since the headline and the food price index were broadly flat in July while core inflation accelerated, we should cite the NBS statistical health warning: that processed food is included in both the core and food sub-indices, which are therefore not mutually exclusive.