Asymmetric Impact of Oil Price on Inflation in Nigeria

Abstract

This study examines the impact of oil price shocks on inflation in Nigeria. A NonLinear Autoregressive Distributed Lag (NARDL) approach was applied on quarterly data spanning 1999Q1 to 2018Q4. Results showed that oil price increases led to increase in headline, core and food measures of inflation in Nigeria. However, a decline in oil price resulted in a decline in the marginal cost of production and culminated in moderation of domestic inflation. Furthermore, negative oil price shocks led to higher inflation in Nigeria when exchange rate is dropped from the models, indicating that exchange rate absorbed the impact of oil price declines earlier, as lower oil prices culminated in lower external reserve, depreciation of the naira and ultimately higher inflationary pressures. Also, core inflation tends to respond more to oil price increases than food inflation. These results were robust to changes in econometric specifications and sample period. The study recommends that monetary policy actions of the Central Bank of Nigeria should focus on taming core inflation in periods of substantial oil price increases while strengthening its efforts at ensuring domestic sustainability in food production through its agricultural intervention programmes to further minimize the impact of international oil prices on food inflation. Similarly, the fiscal authorities should ensure that the fiscal stance is not excessively procyclical in periods of rising oil prices.

An Evaluation of the Optimal Inflation Target for Economic Growth in Nigeria

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Examination of The Impact of Exchange Rate and Petroleum Prices On Inflation with The VAR Model: The Case of Turkey

“…Another main factor affecting domestic inflation has been identified as the exchange rate. Bawa et al, (2020) analyzed the effect of petroleum prices in Nigeria on inflation using datum which from the first quarter of 1999 to the fourth quarter of 2018. He used the NARDL method in his work.…”

The Impact of Energy Price Volatility on Inflation in Nigeria

“…This is because oil price has a high impact on cost of production in Nigeria. Bawa et al (2020) go on to advice for the use of monetary policy to control inflation in the time of oil price increase. The paper also advocates for policies that would promote local agricultural activities.…”