The Determinants of Inflation in Nigeria

Abstract

This paper examined the determinants of inflation in Nigeria using annual time series data covering the period of 1981 to 2017. This period has been carefully selected as it captures the different eras of policy implementation in Nigeria such as the pre–SAP era, SAP era, and the post–SAP era; and is long enough to make an objective assessment of the determinants of inflation in Nigeria. The study applied Auto–Regressive Distributed Lag (ARDL) methodology based on the outcome of the ADF unit root test which revealed that the variables are integrated of I (1) and I (0). The ARDL bounds test result provided evidence of a stronghold long-run relationship among the variables. This necessitated the estimation of ARDL short-run and long-run results. The short-run results of both models revealed that YGAP, M2, TGE, TIMP and UEMPR were significant determinants of inflation in Nigeria whereas the long-run results indicated that TGE, TIMP and UEMPR were significant determinants of inflation in Nigeria. The impact of YGAP, M2, TGE and TIMP was positive in both long and short runs whereas YGAP, TIMP, TGE and UEMPR impacted negatively on inflation in both periods. The outcome of all the diagnostic tests supported the acceptability of the models’ results. The study concludes that both demand–pull and cost–push factors are responsible for inflation in Nigeria and also provide the social infrastructure that would encourage private investment.