Nigeria: Inflation Surges To Six-Year High

The inflation rate rose by 1.9 percentage points from the 13.7 per cent rate it attained in April to 15.6 per cent last month.

The last time Nigeria recorded an inflation rate as high as the 15.6 per cent recorded in May this year was in September 2009 when the rate of inflation was put at 15.86 per cent by the NBS.

The surge was attributed majorly to rise in electricity and fuel prices and was also pushed by higher food costs, the report noted. Food inflation accelerated to 14.9% from 13.2% in April. The average price for a liter (0.26 gallon) of gasoline was 150.28 naira in May, compared with 162.82 the previous month.

The report further stated that the 1.9 per cent increase in the inflation rate in the month of May, when compared to what was recorded in the previous month, indicated an increase in general price level across the economy as all divisions which contributed to the Consumer Price Index (CPI) rose at a faster pace in the month under review.

It clarified: “In May, the Consumer Price Index which measures inflation recorded a relatively strong increase for the fourth consecutive month. The Headline index increased by 15.6 per cent year-on-year, 1.9 per cent points higher from rates recorded in April at 13.7 per cent.

“Year on year, electricity rates as well as other energy prices continue to manifest as key drivers of the core component of the CPI. “During the month, the highest increases were seen in the passenger transport by road, liquid fuel (kerosene), fuel and lubricants for personal transport equipment (premium motor spirit) and vehicle spare parts groups.”

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 report, price of petrol which has been fixed at N145/litre, however the average monthly price paid by Nigerian households for a litre of petrol across the country was var above the official rate.
It noted that during the month, only six states, Lagos, Adamawa, Kano, Niger, Plateau and Zamfara, as well as Abuja sold at the official pump price of N145 per litre.

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.”

While the Central Bank of Nigeria may introduce a dual exchange-rate system and weaken the currency when it unveils a new policy, the naira peg at 197-199 per dollar since March last year and restrictions in trading foreign currencies have made imports more costly for a nation that’s a net importer of food and refined fuel. The Central Bank Governor, Godwin Emefiele left the benchmark rate unchanged at 12 percent last month after the economy contracted in the three months through March for the first time since 2004.

“The challenge for the authorities is how to go about normalizing the foreign-exchange regime,” according to the Managing Director/Chief Economist, Africa, Standard Chartered Bank, Razia Khan, in an e-mailed note to clients, 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.