The National Bureau of Statistics recently released September 2014 inflation numbers which showed that inflation declined for the first time in 6-months to 8.3%. Looking at the breakdowns, the core index component was flat at 6.3% whilst the food index dropped from 9.9% in August to 9.7% in September.
In Nigeria, food accounts for more than half of the CPI basket implying that headline inflation broadly tends to track its trajectory. Indeed, food inflation in the trailing 6-months had also been on an uptrend which a lot of commentary including the Central Bank of Nigeria (CBN) had linked to the Boko Haram insurrection in the north-east.
Figure 1: Annualised Headline, Food and Core Inflation
So why did food prices decline over September? It’s harvest period across most parts of Nigeria. Historically in Nigeria, inflation trends lower in the second half of the year as harvest occurs which sends food prices crashing. Thus, the September reading suggests this trend is much earlier than a lot of analysts expected. Going forward I think you will see inflation trend lower on harvest tailwinds.
What is the likely impact of this on monetary policy? Unlike in other climes, inflation in Nigeria has less of an impact on monetary policy decision which tends to respond more towards currency trends. In any case the CBN said rising inflation suggested monetary policy tightening, thus with this decline we should see that hawkish tone taper down right? I doubt that though because as I said currency trends pretty much dictate policy action. In subsequent blog posts I will try to address this CBN addiction to currency which I believe strongly underpins monetary policy in Nigeria.
What about the likely impact of this on market interest rates? Theoretically lower inflation readings which imply higher real return should see nominal interest rates decline. However in Nigeria, investors are yet to really actively price inflation expectations into market interest rates so not much impact from the money markets. Indeed the naira yield curve has risen recently (~100bps on the long end and ~40bps on the short end thus far in October) following recent oil price declines.
So no impact on policy and lesser impact on market rates as oil price fears roil money markets.
Yours truly is a year older today so J Thanks for reading.