STATISTICAL ANALYSIS ON THE EFFECT OF INFLATION ON NIGERIA’S

ECONOMY

By

Blessing Chibuihe Iheanacho

HND/STA/21/002

Under the Supervision of

MAL.HARUNA IBRAHIM RINGIM

September, 2023

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1.0 INTRODUCTION

The goal of most countries is the desire to maintain a stable price level of goods and services.

This however, appears to be an uphill task given the incidence of inflation presently ravaging

developing economies of the world. Inflation is seen as the increase or general rise in the price of

goods and services (Price level) in an economy over a period of time, resulting in a sustained

drop in the purchasing power of money. According to Wyplosz and Birds (1997), when the

general price level rises, each unit of currency buys fewer goods and services, consequently

inflation reflects a reduction in the purchasing power per unit of money, a loss of real value in

the medium of exchange and unit of account within the economy.

According to Ibrahim and Agbaje, (2013), inflation rate has been increasingly unsteady despite

some stringent policies and efforts made by governments to control and fine-tune its values to a

satisfactory stationary single-digit number. They also argued that factors such as income, high

nominal wages, fluctuations in revenue, and the payment of debt can largely influence inflation

in an economy. According to Dritsakis,(2004), a long-run relationship exists between demand for

money, inflation, real income, and exchange rate. He discovered that the elasticity of real income

was positive, while that of inflation and exchange rate was negative.

Özlen and Ergun (2012) examined the relationship between stock returns and five

macroeconomic variables using autoregressive distributed lag methodology. Their result showed

the existence of long-run relationships between the variables

1.1 STATEMENT OF PROBLEM

The problem of inflation is surely neither a new phenomenon in the economic system of Nigeria

nor the world at large. It has been in existence for over decades. It has been one of the major

problems facing the Nigeria economy for over years because of its undue reliance on foreign
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products which makes the country an import dependent economy. It has been kwon for years to

be a threat in the business economy affecting both business men and women in the business

environment. During inflation, income earners especially those with fixed income and very poor

ones in the society finds it difficult to match with the increasing prices of goods and services.

1.2 AIM AND OBJECTIVES

The aim of this Research is to analyze the effect of inflation on Nigeria economy. This aim

would be achieved through the following objectives:

1. To Fit the linear model

2. To Fit the Quadratic model

3. To forecast using the fitted models

4. To determine the effect of inflation on GDP.

1.3 SIGNIFICANCE OF THE STUDY

The effect of inflation on the economic development of Nigeria cannot be over emphasized,

therefore, this research work is designed to determine the nature of the association between the

menace of inflation and GDP which may in turn help all stakeholders in identifying the right and

lasting solutions to the problem of dwindling economy resulted from the forces of inflation on

the GDP.

This study will be of importance to macroeconomists, financial analyst, academicians, policy

makers and central bank officials in understanding the responsiveness of GDP to the change in

general price level and thus come up with the relevant policies so as to keep prices at the

reasonable rate that stimulate production.

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1.4 SCOPE OF THE STUDY

This work is to cover the effect of inflation on economic development in Nigeria between 2012 -

2022, the data is yearly data.

1.5 LITERATURE REVIEW

There is a huge survey of literature, which investigated the empirical aspects of relationship

between inflation and economic growth. This section presents literature on the impact of

inflation on economic growth peroxide by gross domestic products (GDP). Several empirical

studies that have been undertaken to identify the possible determinants of dwindling economy in

Nigeria have inflation rate as determining variable. Honoham and Lane,(2003) for instance,

studied annual inflation differentials across the Euro zone over the period 1999-2001, and found

a substantial role for the variation in inflation rates in explaining divergent economic strength.

Fabayo and Ajilore (2006) in their paper titled “inflation – How Much is too Much for Economic

Growth in Nigeria” using annual data from 1970-2003 suggested the existence of threshold

inflation level of 6 per cent for Nigeria. They explained that above this threshold, inflation

retards growth performance of the economy while below it, the inflation-growth relationship is

significantly positive.

Yelwa (2015) analyzed the relationship between unemployment, inflation and economic growth

in Nigeria: 1987-2012 in his study that utilizes secondary data and ordinary least squares

estimation technique on the data. The results from his analysis confirm that in the long run,

interest rate and total public expenditure have significant impact on economic growth in Nigeria,

while inflation and unemployment have inverse effects on growth in Nigeria.

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Also, Chimobi (2010) used Nigerian data on CPI and GDP for the period 1970- 2005 to examine

the existence or not, of a relationship between inflation and economic growth

1.6 METHODOLOGY

To achieve objectives of this study, the researcher intends to use leastsqaure method, second

degree parabola and simple linear Regression.

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REFERENCE

Bird, G., &Mandilaras, A. (2006). Regional heterogeneity in the relationship between fiscal

imbalances and foreign exchange market pressure. World Development, 34(7), 1171-1181.

Ibrahim, T. M., &Agbaje, O. M. (2013). The relationship between stock return and inflation in

Nigeria. European Scientific Journal, 9(4).

Dritsakis, N. (2004). Tourism as a long-run economic growth factor: an empirical investigation

for Greece using causality analysis. Tourism economics, 10(3), 305-316.

Ibrahim, T. M., &Agbaje, O. M. (2013). The relationship between stock return and inflation in

Nigeria. European Scientific Journal, 9(4).

Özlen, S., & Ergun, U. (2012). Macroeconomic factors and stock returns. International Journal

of Academic Research in Business and Social Sciences, 2(9), 315.

Honohan, P., & Lane, P. R. (2003). Divergent inflation rates in EMU. Economic Policy, 18(37),

357-394.

Fabayo, J. A., & Ajilore, O. T. (2006). Inflation: How much is too much for economic growth in

Nigeria. Indian Economic Review, 129-147.

Yelwa, M., David, O. O., & Awe, E. O. (2015). Analysis of the relationship between inflation,

unemployment and economic growth in Nigeria: 1987-2012. Applied

Chimobi, O. P. (2010). Inflation and economic growth in Nigeria. Journal of sustainable

Development, 3(2), 159.