Macroeconomic Drivers of Inflation in Nigeria

Abstract

Today, the Nigerian State is worst hit by the negative impact of inflation due to increase in prices. Consequently, the government and stake holders including the academia are curious about searching and indentifying the major drivers of inflation in Nigeria so as to enact policies that could mitigate the negative impact of inflation in the country. To address the conundrum, this study therefore examines drivers of inflation in Nigeria by modeling macroeconomic indices like money supply, government expenditure, fiscal deficits, crude oil prices, trade openness, exchange rate and prime price to determine their various contributions to inflation in Nigeria. The study explored secondary time series data obtained from the CBN bulletin of various issues which were analyzed using econometric regression technique of the Ordinary Least Square (OLS). From the results of the OLS, it was observed that money supply, government expenditure, crude oil prices, trade openness and exchange rate have a positive influence on inflation in Nigeria, although, exchange rate was expected to be either positive or negative. On the other hand, fiscal deficit and prime rate has inverse relation on inflation in Nigeria. The results also showed that all the variables - money supply, government expenditure, fiscal deficit, crude oil prices, trade openness, exchange rate and prime rate are statistically significant in explaining inflation and are also major determinants of inflation in Nigeria. The F-test conducted in the study shows that the model has a goodness of fit and is statistically different from zero. In other words, there is a significant nexus between the dependent and independent variables in the model. The study recommends that to curb inflation, Nigeria needs a proactive leadership that enact and implement enabling laws and policies that will curb corruption which causes leakages in the nation’s monetary and fiscal policies that regulates the various indices modeled this study.