The Latest Drop In Inflation Rate Could Be A Blip?


Nairametrics| The National Bureau of Statistics released its 2016 February consumer price index confirming inflation rate for the month of February was 17.78%. This was the first drop since 2015.

The latest inflation rate suggest prices may have started moderating as the impact of “base effects” tapers down any further month on month rise. Analysts believe that because of the onetime jump in fuel prices and electricity tariff experienced last year, the inflation rate could trend further down.

Analysts who adopt a more cautious view to the outlook for the year, consider the latest inflation rate as a blip. The cite the fact that there are still a lot of products and services that are yet to reflect the rising cost of input. Most businesses are cutting cost in other areas just to maintain market share but may soon run out of steam as the economy worsens. This argument is logical considering the periodic spike in household food items observed by our research team.

Whilst we agree with both observations, we are more inclined to look at factors that could trigger a further hike in inflation rates.

Hike in electricity tariff

The power sector is long overdue for a minor review of its electricity tariffs. A minor review is triggered any time there are major changes to inflation rates, exchange rate and gas prices. The last time tariffs were increased; it was based on an inflation rate of just above 9%. At the current rate of 17%+ power companies are well in line to request for a minor review. If this occurs, the pass on effect will be felt on the inflation rate.

Petroleum product price increase

Nigeria increased fuel prices around May last year by about 66%. This more than any other factor contributed to the increase in the prices of goods and services in the country. Fuel importers are now saying that Nigeria is due for another price hike. The claim is that products are currently being subsidized by the government as landing cost of fuel is now above the retail price of N145. A likely increase sometime this year, could push inflation rates higher.

Another round of devaluation

Since the CBN devalued the Naira in June 2016, the exchange rate has depreciated by more than 35% in the black market. In fact, we now have over 9 exchange rates with each trading at a premium of between 5% to 40% of the official rate of N305. Oil marketers who still manage to import are only able to do so if they can secure enough dollars and at the official rate. The NNPC is currently subsidizing products just to ensure that the pump price of fuel remains at N145. If oil prices stay above $50 for the rest of the year (quite unlikely) then we expect a major change in prices as the year goes.

Natural disaster

There is also an unlikely but plausible threat of a natural disaster occurring this year. A major drought or heavy rainfall could damage food harvest expected in the latter part of this year. Whist we hope this will not be the case, it will be wrong to rule out a likely occurrence of a natural disaster upsetting any inflation model projected for the year.

 

Ugo Obi-chukwu http://nairametrics.com

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder of Nairametrics and blogs regularly on the website.

What's your say?