Inflation may hit 15% in 2012 – Renaissance Capital Analyst

Financial and macro-economic analysts have signaled that the removal of fuel subsidy by the Federal Government will have grave attendant consequences on inflation, beyond simply pushing up transport costs but also affecting a wide basket of goods and services.

According to an emailed report from Yvonne Mhango, a macro-economist with Renaissance Capital, “The impact of the petrol price hikes could go beyond simply pushing up transport costs. It is also expected to affect the cost of producing goods and services. In particular, the prices of food, clothing and footwear, furnishings, as well as housing and utility costs may tick up on the back of the scrapping of the petrol price subsidy.”

Also taking cognizance of the fact that millions of Nigerians utilize petrol to generate electricity from affordable generators, the report states, “In addition to higher petrol prices, the cost of producing electricity from petrol-powered generators is also expected to rise. The impact of the higher petrol price on food will resonate with most Nigerians, as it makes up half of the cost of the average Nigerian consumer’s shopping basket.”

“As only a fraction of Nigeria’s food produce is processed… the cost of electricity used to process food is likely about 5% of the total cost of production. The next big cost in the consumer basket is that of housing and utilities, including electricity, which constitutes almost 20% of the consumer basket. Power and petrol costs make up 20-25% of the total housing and utilities cost, according to our crude estimates. Based on these, we expect inflation to increase from a projected 10.9% at YE11 to 13-14% YoY in 1Q12, and to tick up during 2012 and average about 15% for the year. Should the government be persuaded to phase the removal of the petrol subsidy as a means of easing the burden of price increases, then the increase in inflation could be more moderate.”