June 19, 2012/ THE ANALYST/ PROSHARE RESEARCH

High inflation rates have been the root cause for higher interest rates. The CBN constantly increased MPR in 2010 and 2011 to rein the monster of inflation. But since July 2011, Inflation which has gone down started to rear its ugly head again. It has been steadily rising at a very slow pace while it further went up in 2012. Unfortunately the reason for this is not higher demand but the partial fuel subsidy removal which was announced at the beginning of 2012.

High food price is another factor that affects inflation. Inflation was one of the main concerns of emerging economies in 2011 and was primarily driven by high food prices across the globe.

This led to tightening of monetary policy and slowdown in many countries. Although the food prices have come down in the first two months of 2012, the trend is not expected to continue for long. According to the United Nations Food Agency, prices of grains and vegetables will remain firm due to demand - supply mismatch.

Based on information released by the National Bureau of Statistics in Nigeria, inflation in the year 2011 kept fluctuating as it closed at 12.1% in January while it dropped to 9.4% in July and eventually 9.3% in August same year. The figure rose to 10.3% in Sept as it closed the year at similar rate after closing at 10.5% in October and November.

The figure rose sharply in January 2012 to 12.6% due to the partial removal of the subsidy on the Premium Motor Spirit (petrol) that pushed up prices of many food and non-food items as a result of the increase in transportation costs. It went down to 11.9% in February as while it eased from 12.9 in April to 12.7% in May 2012.

The CBN Monetary Policy rate which opened the year 2011 at 6.25% moved up by 25 basis points in January at stand at 6.50% while it kept moving until it reached 12% in October 2011. The CBN Monetary Policy committee has kept the rate on hold at 12% for the fourth time in a row, citing the need to balance inflationary concerns with slowing growth.

Nigeria's consumer inflation eased slightly to 12.7% in May 2012, from 12.9% in April, data showed, adding to expectations the central bank will keep interest rates on hold in the near term. The outlook on inflation trend for half year 2012 remains upward as new tariffs on cereals and electricity trickles down to push up Composite Price Index components.

Related Report: 
1. Inflation and Rising Food Prices in Nigeria