Analysts See Bleak Future As Inflation Hits 15.6% | Independent Newspapers Limited
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Analysts See Bleak Future As Inflation Hits 15.6%

Posted: Jun 15, 2016 at 7:05 am   /   by   /   comments (0)

Bamidele Ogunwusi & Isuma Mark


LAGOS/ABUJA – Economists and analysts have expressed fears that the Nigerian economy may soon get out of control if urgent steps are not taken by the Federal Government and other relevant agencies of government to curb inflation.

As predicted by analysts earlier in the week, the consumer price index (CPI), which measures inflation in the country, recorded its highest upward movement in the month of May, a relatively strong increase for the fourth consecutive month.

According to the National Bureau of Statistics (NBS), the headline index recorded the highest rate in the last six years when it moved up to 15.6 percent (year-on-year) from 13.7 percent recorded in April.

The increase in rates in May relative to April, according to NBS, reflects an overall increase in general price level across the economy as all divisions, which contribute to the headline index increased at a faster pace in May.

Year-on-year, electricity rates as well as other energy prices continue to manifest as key drivers of the core component of the CPI. The core sub-index increased by 15.1 percent in May, up by 1.7 percent points from rates recorded in the previous month.

During the month, the highest increases were seen in passenger transport by road, liquid fuel (kerosene), fuels and lubricants for personal transport equipment (premium motor spirit) and vehicle spare parts groups.

The inflation data for May showed a month-on-month increase of 1.2 percent in consumer prices from 1.6% in April to 2.8 percent in May. Both food and core inflation increased by 1.7 percent (year-on-year) in May. Urban inflation (year-on-year) rose by 2.1 percent while rural inflation increased by 0.7 percent. Imported foods as well as a drawdown of inventories across the country continue to push food prices higher, according to the report.

The food sub-index increased by 14.9 percent in May, up by 1.7 percent points from rates recorded in April as all major food groups which contribute to the food sub-index increased at a faster pace driven by higher food prices in fish, bread and cereals, and vegetables groups for the second consecutive month. In addition, the imported food sub-index increased by 18.6 percent in May, 2.2 percent points from rates recorded in April.

Month-on-month, after a brief respite in rates in March and April, the rates recorded by the headline index increased at a faster pace in May. The index increased by 2.8 percent, up by 1.1 percent points relative to rates recorded in April.

Analysts’ consensus was for a CPI spike of 14.5 percent. However, the reality and magnitude of the spike to 15.6 percent was surprising. FSDH was accurate in its inflation forecast. This is the highest price level in Nigeria since February 2010. The inflation trajectory rose sharply since February 2016 when it spiked to 11.4 percent.

Reacting to the report, analysts at Financial Derivatives Company Limited said both fundamental cost pressures, periodic scarcities of essential commodities and forex unavailability caused the current inflation spiral.

“The transmission effect on consumer prices was elevated mainly by an astronomical jump in the price of diesel from N130 per litre to N185. Diesel fuel is critical to distribution and logistics in the delivery of goods to the market. It also explains the widening differential between rural and urban inflation.

“The monetary policy authorities at their last meeting refused to tighten further by leaving the MPR unchanged. It preferred to support growth because of the fears of an impending recession,” FDC noted.

Bismarck Rewane, Managing Director and Chief Executive of FDC, predicted last week that inflation rate for the month of May would hit 15.58 percent, which is close to Independent projection of 16 percent.

Independent’s assumption for the 16 percent was based on the 100 percent increase in transportation since the official hike in pump price of fuel.

At N145/l, only few cities such as Abuja, Lagos and Port Harcourt maintain the official price cap. Even at that, prices monitored in some filling stations outside the cities showed N25 to N80 differentials, which should also influence prices of goods.

Because key producers of consumer goods such as yam, tomato, rice, pepper among others, buy fuel higher than the official price of N145, studies point to increase in Composite Consumer Price Index (CCPI) to as high as 200.325.

“We expect the increase in the inflation rate to come from increases in most of the divisions which contribute to the index,” Mr. Rewane said referring to key producers of goods and transporters outside the cities.

He posited that FDC’s model indicates that the price movements in the consumer goods and services in May 2016 would increase the CCPI to 198.31 points, representing a month-on-month increase of 2.75 percent.

Experts at Cowry Assets Management Company said they expect that inflationary pressure will remain for the remaining part of the year, as long as Nigeria’s foreign exchange mechanism and export earnings remain challenged.

“Increased inflation rates portend reduced purchasing power of consumers, which constitutes the largest chunk of gross domestic product.  Hence, a reduction in consumer confidence would be an indicator of future decline in output.

“Against the backdrop of significant fiscal deficit as well as recent trade deficit, we expect fixed income investments to remain attractive as investors are compensated with higher yields. However, the equities market is expected to be negatively impacted by higher interest rates”, they concluded.

Albert Justus, a financial analyst, said the new rate is a pointer to the fact that things are certainly not been done the right way in this country.

“If you look at the inflation rate in the last one year, you will notice a gradual increase month-on-month and the implication of this on the people is that the Nigerian masses will continue to wallow in abject poverty.

“This is simply a gradual descent to poverty. The average Nigerian who has been battling to cope with the pressure of inflation will soon surrender to the suffering associated with this. I hope Nigerians will not begin to show their anger on government soon.

“Let me say this that the CBN in its next monetary policy meeting will respond to this by increasing interest rate. I told you last time the MPC met that they will increase the interest rate and you saw what happened. The purchasing powers of Nigerians are dwindling and it seems this government has nothing to do to ameliorate it.

“The way out of this is to devalue the naira and let us start from the basis all over again”, he added.

Matthew Ogagavworia, a chartered accountant and a stockbroker, said “the average Nigerian lifestyle has been reduced by the increase in rate of inflation month-on-month because interest level remains the same and as fixed income earners who are unable to pass on the increase in cost of living to third party make things difficult for the average Nigerian”.

He added that the average Nigeria is worse off and has been “pauperised by the cluelessness of the current leadership we have in Nigeria.”