INFLATIONARY PRESSURES TO PERSISTS IN SECOND QUARTER - FDC ANALYST

By Babajide Komolafe
The possibility of further rise in the rate at which prices of goods and services increase would persist in the second quarter of the year, says   Damilola Akinbami of Financial Derivative Company (FDC).

Inflation rate, which is the rate at which prices of goods and services increase, dropped to 11.9 per cent in February from 12.6 per cent the previous month.

'Notwithstanding the recent developments, inflationary pressures are expected to persist in Q2'12 due to the impending hike in electricity tariffs and the partial removal of the fuel subsidy', he said in the company's economic bulletin released last week.

'Also, on the fiscal side, the increased fiscal spending approved in the 2012 budget plan could pose inflationary risks if the funds are not channelled towards the development of capital projects. The FAAC allocation for the month of February- N921bn (the highest so far since June 2011) released in March, should also be taken into consideration be-cause of its effect on the liquidity status of the economy. Nonetheless, we expect the inflation rate to remain flat in March', he said.

The decline in inflation rate was contrary to general expectation as most analysts predicted that the 50 per cent increase in price of petrol will rise cause the inflation rate to rise. Akinbami  said the unexpected decline in inflation rate might be attributed to three factors:  Disproportionate drop in the disposable and discretionary income of urban and rural dwellers; Effect of previous tight money supply; and exchange rate stability.

He said, '  The ease in headline inflation reflects a much more subdued impact than expected of the partial subsidy removal on prices; which has manifested itself in a disproportionate drop in the disposable and discre-tionary income of urban and rural dwellers.

The festive season in December, coupled with the strike in January contributed immensely to the decline in discretionary income thereby; resulting in a switch in the spending pattern of consumers.