Determinants of Inflation in Nigeria

Abstract

This study investigates the determinants of inflation in Nigeria using time series data spanning from 1999 to 2023. Employing a multiple linear regression model, the research examines the impact of Money Supply, Government Expenditure, Fiscal Deficits, Crude Oil Prices, Trade Openness, Exchange Rate and Prime Rate on the Inflation Rate. The study utilizes the Least Squares method for estimation. The findings reveal that several factors significantly influence inflation in Nigeria. Money Supply (coefficient = 0.100543, p < 0.0001), Government Expenditure (coefficient = 0.050121, p < 0.0001), Crude Oil Prices (coefficient = 5.035158, p < 0.0001), Trade Openness (coefficient = 0.101469, p = 0.0012), and Exchange Rate (coefficient = 0.159773, p = 0.0013) are found to have a positive and statistically significant impact on inflation. Conversely, the Prime Rate (coefficient = -1.828994, p = 0.0073) exhibits a significant negative relationship with inflation. Interestingly, Fiscal Deficits (coefficient = -0.100102, p = 0.0003) also showed a significant negative association with inflation, a finding that warrants further investigation. The model demonstrates a good fit with an R-squared of 0.758139 and is statistically significant overall (Prob(F-statistic) = 0.000000). Based on these findings, the study recommends the implementation of prudent monetary policies to control money supply growth, alongside efforts to manage government expenditure effectively. Diversification of the economy to reduce reliance on crude oil exports is crucial for mitigating external price shocks. Policies aimed at stabilizing the exchange rate and promoting a balanced trade environment are also essential. The Central Bank can effectively utilize the prime rate as a tool to curb inflationary pressures. Further research is recommended to explore the complex relationship between fiscal deficits and inflation in Nigeria.