The Dynamic Impact of Energy Price Fluctuations on Inflation in Nigeria: Evidence from 1990–2023
The Dynamic Impact of Energy Price Fluctuations on Inflation in Nigeria: Evidence from 1990–2023

Summary/Abstract: Background: Nigeria, Africa’s largest oil producer, paradoxically experiences persistent macroeconomic instability due to volatile domestic energy prices. Energy costs have a direct bearing on inflationary pressures, making it vital to examine their role in price dynamics. Objective: This study investigates the dynamic impact of energy price fluctuations on inflation in Nigeria between 1990 and 2023, focusing on major energy components, petrol, diesel, and electricity tariffs. Methods: The Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration was employed to capture both the short-run and long-run relationships. Control variables such as exchange rate and broad money supply were included to strengthen the robustness of the model. The Error Correction Model (ECM) was further applied to assess the speed of adjustment toward long-run equilibrium. Results: Findings reveal a significant and positive long-run relationship between energy prices and inflation, with petrol prices exerting the strongest impact. The ECM results indicate a moderate speed of adjustment following external shocks, underscoring the sensitivity of the Consumer Price Index (CPI) to energy price volatility. Conclusion: Energy price volatility is a major driver of inflation in Nigeria. A multi-pronged policy strategy is recommended, including stabilizing domestic supply chains, diversifying the energy mix, and implementing targeted social safety nets to cushion vulnerable households against adverse impacts of energy price adjustments.

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