Inflation Rises to Six-year High of 15.6%

Analysts push for policies to tame galloping prices
Obinna Chima and James Emejo in Abuja
The Consumer Price Index (CPI) which measures inflation, rose sharply to 15.6 per cent in May compared to 13.7 per cent in the previous month, the National Bureau of Statistics (NBS) stated on Tuesday.

At 15.6 per cent, inflation touched a six-year high, its highest since February 2010.
The NBS attributed the 1.9 per cent increase in inflation to the overall increase in the general price level across the economy, as all divisions which contribute to the CPI rose at a faster pace in May.

NBS noted that electricity rates as well as other energy prices continued to manifest as key drivers of the core component of the CPI, adding that imported food as well as a drawdown of inventories across the country continued to push food prices higher as the food sub index increased by 14.9 per cent in May, up by 1.7 per cent in April.
According to the CPI figures for May, the highest increases in rates were seen in the passenger transport by road, liquid fuel (kerosene), fuels and lubricants for personal transport equipment petrol and the vehicle spare parts groups.

The NBS stated: “All major food groups which contribute to the food sub-index increased at a faster pace driven by higher food prices of fish, bread and cereals, and vegetables groups for the second consecutive month.”
Urban inflation increased by 0.8 per cent to 3.0 per cent in May from 2.2 per cent in April, while the rural index increased by about 1.1 per cent to 2.4 per cent from 1.4 per cent in April.

According to the NBS, “Increased prices of both domestic and imported food products continue to drive food prices higher. The index increased by 14.9 per cent (year-on-year) during the month of May, 1.7 per cent points higher from rates recorded in April.

“All groups which contribute to the index increased with the highest increase recorded in the bread and cereals group which increased from 14.5 per cent in April to 16.6 per cent in May. On a month-on-month basis, the food sub-index increased by 1.3 per cent points from 1.3 per cent in April to 2.6 per cent in May.

“On a month-on-month basis, the highest price increases were recorded in the bread and cereals; vegetables, sugar, jam, honey, chocolate and confectionery groups. The average annual rate of change of the food sub-index for the twelve-month period ending in May 2016 over the previous twelve month average was 11.2 per cent, 0.4 per cent points from the average annual rate of change recorded in April.”

However, the average monthly price paid by Nigerian households for a litre of petrol across the country dropped to N150.28/litre in May compared to N162.82/litre in April, the NBS revealed.
The official pump price of petrol stood at N145/litre, but figures provided showed that on the average, Nigerians bought petrol above the official rate in the period under review.

Meanwhile, following the sharp hike in inflation for the fourth consecutive month, financial analysts yesterday stressed that the challenge before the Central Bank of Nigeria (CBN) and fiscal authorities was how to go about normalising the foreign exchange regime, and more broadly activity – in their bid to resolve fuel and other supply bottlenecks that have constrained growth while driving inflation higher.

Managing Director/Chief Economist, Africa, Standard Chartered Bank, Razia Khan, in a note to THISDAY, pointed out that the spike in inflation happened even against a backdrop of subdued economic activity, given the outright contraction in the Gross Domestic Product (GDP) in the first quarter of 2016, and indications that oil output in second quarter was likely to be even weaker.

The findings, according to her, were broadly consistent with the Standard Chartered-Premise Consumer Price tracker which rose by a record 2.75 per cent month-on-month in May.
“In our view, rising price pressures were likely instrumental in the authorities’ changed stance on the forex policy. Nigeria’s fixed exchange rate regime had merely pushed activity to the parallel market, which is prone to overshooting, less susceptible to formal policy tightening, and likely played a significant role in exacerbating current price pressures.

“The challenge for the authorities is how to go about normalising the forex regime, and more broadly, activity – in their bid to resolve fuel and other supply bottlenecks that have constrained growth while driving inflation higher.

“Given where inflation already is, there will be a need for gradualism. However, in our view, any moves towards meaningful forex flexibility will need to be supported by tightening, in order to restore some degree of credibility to policy. This may well have implications for the timing of any announcement on currency flexibility,” Khan added.
In its comment, Financial Derivatives Company Limited (FDC) stated that the structural bottlenecks in the energy, power and logistics sectors still continue to impede productivity.

“These factors, combined with uncertainty in the country’s macroeconomic direction, are eroding investor and public confidence,” the company said in a report yesterday.
According to the report, the impact of consistent increase in prices was indicative of an erosion of value and confidence in economic agents.

“With the economy grappling with negative growth, policy makers are unlikely to favour an increase in benchmark interest rates. Bond rates have settled in the region of 13 per cent to 14 per cent in recent weeks, and we do not expect any significant change in bond rates unless there is a sizable variation in liquidity or the exchange rate policy.

“Nigeria is likely to experience a high inflation environment for most of the year, albeit at a slower pace in coming months. The release of the forex policy guidelines will trigger an increase in consumer prices in June and July before correction takes place in Q4.

“In addition, the contraction in money supply, reduction in disposable income, rising consumer resistance and early harvest would dampen inflationary pressures,” the report added.
Also, CSL Stockbrokers Limited pointed out that the two major overall drivers of inflation presently are currency weakness and electricity shortages. On the former, the firm pointed out that there is a great deal of uncertainty as the market awaits details on a new currency policy from the CBN.

“Although the publication of the policy might see an appreciation of the naira on the parallel market, the new policy is likely to entail a reduction/removal of forex at the current official rate of N199/$1.
“Overall, therefore, the average rate at which firms are able to gain access to forex is unlikely to be significantly altered and there is not likely to be disinflationary impetus from the currency, in our view.

“As for power supply disruptions, among other causes, these are largely the result of a decline in the amount of gas being supplied to generation facilities on the back of militant attacks on oil and gas pipelines.
“Militant group the Niger Delta Avengers has indicated a willingness to talk to the government, which on the surface appears to be progress.

“However, one of the Avengers’ conditions of talks is that international oil companies cease all production from the region. Against this backdrop, it seems to us that oil and gas supplies are more likely to get worse before they get better. It is with this in mind that we believe that risks to our year-end forecast are to the upside. One potential ray of light is the improvement in supply of refined products and resultant declines in petrol pump prices,” CSL said in its report.