How fuel crisis worsened May inflation

Fuel scarcity long queue

Queue at a petrol station

The scarcity of petroleum motor spirit, popularly called petrol, which peaked in May, with leftovers currently, aided the rising profile of inflation in the economy to nine per cent.

The inflation rate, which is at 24-month high currently, (from May 2013), moved 30 basis points (bps) higher from 8.7 per cent recorded in April 2015 to nine per cent.

Already, at the current level of inflation, the upper limit target of nine per cent set by the Central Bank of Nigeria (CBN) has been reached.

Meanwhile, JPMorgan has extended the planned removal of Nigeria from its bond index for the Emerging Markets by six months.
T
he country’s investment rating was downgraded earlier to what experts believed is three steps below investment grade over assessed illiquidity of the currency market by six month.

However, Bloomberg’s Emerging Market Sovereign Bond Index at the weekend, showed Nigeria’s Government Bond Index, along with six other sub-Saharan African countries performing better than developed those in developed markets.

According to details from the National Bureau of Statistics (NBS), when measured month-on-month, it represented 1.1 per cent increase May, the highest month-on-month increase since June 2012.

But speaking on the development, NBS blamed the acceleration in the headline inflation to increases in the Classification of Individual Consumption by Purpose (COICOP), divisions, which contribute to the total index.

However, a securities trading firm, in a Note to The Guardian, said the upward trend in the COICOP divisions was not unconnected to the scarcity of petrol, which led to increased pump price of petrol in May.

Justifying the assertion, Afrinvest Securities Limited, said the development had inter-related effects on the prices of other consumer commodities and related services.

The increases in the COICOP divisions were also observed in the major sub-indices of the headline index as both core and food inflation accelerated in the period under review, with Food Index rising by 9.8 per cent year-on-year- 30bps higher than 9.5 per cent in April.

Still, NBS attributed the increases in food prices to the combined effect of higher transportation cost and late onset of rain, which delayed the harvest period.

The statistical agency, while believing that the divers of inflation in May are transient, raised concern over the possible fuel subsidy removal by the new administration as a risk factor for future price stability.

Besides, it noted that a combination of glut in global crude oil supplies, its impact on external reserves accretion and the exchange rate stability also remain key risk factors.

“However, monetary policy may be insufficient to stem the tide in price levels, especially as inflation in Nigeria remains a cost-push phenomenon. On the other hand, a tighter monetary policy may further constrain economic growth potential, while the CBN may tolerate higher inflation rate in trade-off for external sector stability.

“We expect inflation rate on month-on-month basis to moderate in June as fuel scarcity has considerably reduced, even as general price level seems to be normalizing. Nevertheless, we retain our 9.5 per cent inflation rate forecast for 2015,” analysts at the securities company said.

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