The Determinants of Inflation in Nigeria

The Determinants of Inflation in Nigeria

ABSTRACT

Inflation is one of the macroeconomic problems facing many developing countries today and Nigeria is not exempted. Inspite of the use of monetary and fiscal policy measures. For controlling inflation in Nigeria, inflation still remains a serious and contentious problem in Nigeria. The major purpose of the study is to highlight the determinants of inflation in Nigeria and to check the trend of inflation over time and the measures to curb it.

The data were largely the secondary type and the main source is the CBN statistical bulletin for the period of 1980 – 2009. The methodology involves the use of classical linear regression model using E-views econometric package. These include R2 and adjusted R2 to test the explanatory power of the estimates, t-test to determine the significance of the entire regression plan and the second order tests which include a test for auto-correlation, test for stationary, Normality test.  The regression result shows that Government expenditure has a positive impact on inflation while real exchange rate, real GDP and money supply hurt inflation respectively. This implies that an increase in money supply, real GDP and real exchange rate will reduce inflation while an increase in government expenditure will increase inflation. The researcher advises that monetary and fiscal policies should be used to control and direct the economic activities of a country to avoid inflation.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The avoidance of rapid increases in price which in turn leads to inflation is one of the macroeconomic objectives of any economy. Inflation as the name implies can be described as a sustained rise in prices (Johnson), a continuing increase in the general price level  (Brooman),a persistent and appreciable rise in the  general level of prices (Shapiro) and a continuing rise in prices as measured by an index such as the consumer price index  (CPI) (Dernbery and Mc Donegall).

Robert J. Gordon describes three major types of inflation as the “triangle model’’ and these include demand-pull inflation, cost-push inflation and built-in inflation.

Demand-pull inflation according to him is caused by an increase in aggregate demand due to increased private and government spending.

Cost-push inflation also known as Supply shock inflation is caused by a drop in aggregate supply as a result of natural disasters or increased prices of inputs.

Built-in inflation is induced by adaptive expectations and involves workers trying to keep their wages up with prices and firms passing these higher labour costs onto their customer as higher prices, leading to a vicious circle”.

The presence of inflation in an economy leads to a fall in the function of money as a medium of exchange and a store of value.

Inflation started in Nigeria after the 2nd world war. The central bank of Nigeria being part of the macroeconomic management indulges in finding out the determinants of inflation in the economy and sets up the required macroeconomic policies that will help to reduce the inflationary rate in the economy.

Inflation can be the form of galloping inflation which is a situation whereby the inflationary rate becomes immensurable and uncontrollable ( that is the price rise is from 20 to 100 per cent per annum or more) it is also known as hyper/ runway inflation.

The Nigeria economy is experiencing a situation of stagflation (that is the presence of unemployment coupled with high rate of inflation)

Several theories have been suggested by economists to describe the nature and causes of inflation and one of such theories is the demand pull theory which is the rise in aggregate demand and less supply of goods (that is too much money chasing fewer goods).

Inflation in Nigeria has affected one of the factors of production land to be precise by its continuous price increase and demand by the comprador bourgeois who use it for their various investments.

However, inflation is described as a persistent rise in the general price level and it’s the dependent variable in this course of study.

1.2 STATEMENT OF THE PROBLEM

Inflation hurts the economy as a whole. If it is not backed up with an increment in the wages and salaries of workers, it leads to a fall in the standard of living and economic development of a nation.

High or unpredictable inflation rates are regarded as being harmful to the overall economy. They add deficiencies in the market and make it difficult for compaines to budget or plan long-term. Uncertainty about the future purchasing power of money discourages investment and saving.

Developing nations have been crippled in the aspect of obtaining a higher rate of capital formation due to severe and prolonged inflation.

In Nigeria, some of the macroeconomic variables determining inflation are said to be real GDP exchange rate, government expenditures and money supply.

This study looks into these determinants of inflation and tries to provide appropriate macroeconomic policies that will lead to its reduction.

1.3 OBJECTIVE OF THE STUDY

The objectives of this study are;

1.  To determine the possible determinants of inflation rate in the country.

2.  To provide possible economic policies and solutions  to the issue of inflation in Nigeria.

1.4 RESEARCH HYPOTHESIS

This hypothesis is formulated to acquire necessary information and basic assumption to the study

H0:    There is no significant relationship between inflation rate and money

supply, exchange rate, real Gross Domestic product and Government expenditure leading to a negative impact on inflation in Nigeria.

H0: K0 = 0

H1:    There is significant relationship between inflation rate and money

supply, exchange rate, real Gross domestic product and Government expenditure leading to a positive impact on inflation in Nigeria.

H1: K1 ≠ 0

1.5 SIGNIFICANCE OF THE STUDY

This study apart from its set objectives will be important in the following ways:-

(1)     It will help policy makers in their zeal to establish policy measures for handling the issue of inflation in Nigeria.

(2)     It will advance the knowledge of users on inflation.

(3)     It will serve as a guideline for further research work on this particular

topic.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This research work is from the period of 1980 to 2009 and is being limited by finance and time. Notwitstanding its limitations, it is assumed that it will serve the purpose for which it is carried out.