Analysts say Electricity cost may fuel core inflationary pressures

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Analysts say Electricity cost may fuel core inflationary pressures

Analysts at Cardinalstone Partners have stated that electricity cost may stoke core inflation pressures from April, 2020.

Analysts said this in reaction to proposed increase in electricity cost in the nation.
Electricity consumers have been pre-informed about new electricity tariff that is expected to take effect from second quarter of the year.

However, in its review the investment firm said that the key upside risk to headline inflation is rooted in core inflation.

Analysts said though food pressures have been in the spotlight since the border restrictions were instituted in August 2019.

Cardinalstone said to this point, it notes that the Nigerian Electricity Regulatory Commission (NERC) has advised power distribution companies to gross up electricity tariff by 50.0% from April 2020 as opposed to the 30.0% increase previously expected by the market.

Analysts said this planned increase is said to be largely in line with efforts to meet tariff shortfall funding target for 2020 by the Federal Government (FG).

If implemented, average electricity tariff is likely to increase to N40.95/kWh on 01 April 2020 from N27.30/kWh currently, it affirms.

In order to distill the potential pass through of the proposed increase on core and headline inflation, analysts draw insights from similar electricity price adjustments implemented in 2016.

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Analysts recalled that precisely, following the 41.0% to 45.0% hike in electricity prices in February 2016, month on month (MoM) headline.

The core inflation surged from 0.87% and 0.84% apiece in January 2016 to 2.30% and 2.72%, respectively, in February 2016.

Worthy of note, MoM inflation in NBS’ electricity heavy core sub-component “Housing Water Electricity and Other came in at 6.7% MoM in February 2016 compared to an average of 0.4% MoM in the preceding five months, analysts at Cardinalstone held.

“We believe that the hike in tariff contributed significantly to these pressures given that the other key factor that would have had a hand in the pressures only commenced in the last week of February 2016.

“In our view, therefore, the planned electricity tariff adjustment, which is of a similar scale to that of 2016, is likely to have a similar impact on inflation between April 2020 and the beginning of main harvest in September/October 2020”, Cardinalstone projected.

“With electricity tariff increase now likely to be higher at 50.0% than the 30.0% previously expected, we revise our 2020 headline forecasts to 12.9% compared to 12.2% in previous estimates”, it said.

It said specific revisions made include increases in MoM headline inflation targets to 2.00% and 1.20% apiece for April and May 2020, respectively as against an average of 0.97% in the preceding five months.

“We hold the view that this forecasted surge in inflation, predicted temperance in the pace of OMO maturities, and weaker oil price outlook may contribute to a possible reversal of current yield moderation in Q2’20/Q3’20”, Cardinalstone stated.

According to the National Bureau of Statistics (NBS), Nigeria’s headline inflation accelerated to 12.13% year on year (0.87% MoM) in January 2020, largely in line with Bloomberg consensus of 12.12% year on year.

The current reading is also 15 bps ahead of the December 2019 reading; with pressures stemming from the food inflation sub-index which surged+18 bps to 14.85%.

The pressure on the food basket was linked to price pressures from bread & cereals, meat, oil & fats, potatoes, yam & other tubers, and fish.

“While we retain our view on the impact of stricter border enforcement on food prices partly due to consumption re-allocations from imports to domestically produced alternatives,

“increasing communal conflicts, banditry, and kidnapping in central and northwestern Nigeria may have added further pressures on food prices in the review month”, analysts remarked.

Notably, pressures on cereal prices may have also reflected weaker-than-expected yield from the recent main harvest on prolonged rainfalls and flooding in some producing areas.

“In our view, inflation is likely to come in at 12.29% year on year in February”, Cardinalstone said.

Analysts say Electricity cost may fuel core inflationary pressures by Ogochi Ndubuisi