Recently released December inflation report showed that headline inflation rate further increased to 11.44% year-on-year (from 11.28% in November 2018) in line with our expectation. The further rise in annual inflation rate was driven by higher prices of food, especially in Abuja, Bayelsa and Nasarawa States – food inflation in the respective states increased to 16.50%, 16.23% and 16.15% in December 2018. Hence, the pressure on general price level of food persisted y-o-y to 13.56% (higher than 13.30% in November), partly due to the flood and security challenges experienced in some parts of the country in 2018.
However, core inflation rate further declined on an annual basis to 9.77% (from 9.79% in Novemeber). This was partly driven by y-o-y decrease in the costs of transport (-0.21%) despite the y-o-y rise in clothing & footwear (+0.14%) and energy cost (+0.09%). Also, y-o-y change in price level for imported food increased to 15.66% from 15.55% amid yearly average depreciation of the Naira against USD (FX rate fell y-o-y to N340.16) at the interbank FX market as well as y-o-y increase in global commodity prices: such as wheat (rose 14.77% to USD211.28/MT).
Further analysis revealed that Inflation rate in the urban and rural areas rose y-o-y to 11.73% and 11.18% in Decemeber 2018 respectively from 1.61% and 10.99% in November 2018 respectively. On the global scene, United States’ annual inflation rate in December 2018 fell to 1.9% from 2.2% in November 2018. The lowest annual inflation rate since August 2017 was mainly driven by a decline in gasoline cost. Year-on-year, prices fell for gasoline (-2.1% compared to +5% in November); new vehicles (-0.3% compared to +0.3%); and medical care commodities (-0.5% compared to +0.6%).
Also, cost slowed for fuel oil (1.9% in December 2018 compared to 16.1% in November 2018); transportation services (2.8% compared to 3.3%); and used cars and trucks (1.4% compared to 2.3%). On the other hand, inflation jumped for electricity (1.1% in December 2018 compared to 0.6% in November 2018); food (1.6% compared to 1.4%); and medical care services (2.6% compared to 2.4%) but was steady for shelter at 3.2%. Similarly, y-o-y annual inflation rate in the United Kingdom declined to 2.1% in December 2018 from 2.3% in November 2018. The lowest inflation rate since January 2017 was due to lower cost of petrol and air fares.
Further analysis showed that y-o-y prices slowed for fuels and lubricants (3.4% compared to 8.9%); transport services (1.5% compared to 3.9%); miscellaneous goods and services (0.1% compared to 0.4%); as well as furniture, household equipment and maintenance (0.4% compared to 0.7%). Also, cost of clothing and footwear fell further (-0.9% compared to -0.8%).
We expect further upward pressure on general price level of goods and services in January 2019 as Nigeria’s Presidential election campaigns intensify. Meanwhile, ahead of the 265th Monetary Policy Committee (MPC) meeting scheduled for Monday and Tuesday, January 21 and 22, 2019, we expect the MPC to retain the MPR at 14%, within the existing asymmetric corridor of +2% and -5%. This is against the backdrop of rising inflation expectations amid implementation of minimum wage, foreign exchange pressure and the need to maitain positive real interest rates in order to attract portfolio inflows which have largely reversed in recent times.
Although inflation rate declined – driven chiefly by lower energy costs – in the United States and United Kingdom in December 2018, we note that this might be short-lived, as the crude oil price at the international market reversed its downward trend in January 2019. Hence, the case for a cautious move by the United States Federal Resrves Committee to retain policy rate, at least in the first quarter of 2019 amid expected GDP growth.