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1.1 BACKGROUND TO THE STUDY
Inflation is an inevitable property of any economy in the world. It influences every country, negatively as well as positively, whether it is developed or developing country as well. Anyanwu (2011) stated that inflation is an important factor leading to social and economic instability and disorder. It is one of the most largely observed and tested economic variables both theoretically and empirically. Its causes, impacts on other economic variables, and cost to the overall economy are well known and understood.Nigeria, being a developing country, could not overcome the continuously year to year climbing up inflation, and also its causes and consequences.
After remaining relatively low for quite a long time, the inflation rate in Nigeria started to accelerate in late 2003 . The role of money supply appears significant in influencing food price inflation in Nigeria (Anyanwu, 2011).which disturbed family budget as well as consumer’s purchasing power. People struggled in order to maintain their living standard but it slumped down gradually. Many authors have written on the impacts of inflation and cost of living on the Nigerian economy, but the authors have different views, nevertheless, one common thing is that all the authors agree that inflation and cost of living have various impacts on the economy of Nigeria.
The problem created by the rising prices of goods and services leading to higer cost of living has become too difficult for the government to solve. During inflationary period, fixed amounts of money buy less quantity of goods and services. The real value of money is drastically reduced i.e the purchasing power of consumers are reduced.
To attain sustainable economic growth coupled with price stability continues to be the central objective of macroeconomic policies for most countries in the world today. Among others the emphasis given to price stability in conduct of monetary policy is with a view to promoting sustainable economic growth as well as strengthening the purchasing power of the domestic currency (Umaru and Zubairu, 2012). The question on whether or not inflation is harmful to economic growth has recently been a subject of intense debate to policy makers and macro economists. Several studies have estimated a negative relationship between inflation and economic growth. Specifically the bone of contention is that whether inflation is necessary for economic growth or it is detrimental to growth. Basically the rate of economic growth depends primarily on the rate of capital formation and the rate of capital formation depends on the rate of savings and investment (Datta and Kumar, 2011). World economic growth and inflation rates have been fluctuating. Likewise, inflation rates have been dominating to compare with growth rates in virtually many years (Madhukar and Nagarjuna, 2011) and relationship between inflation and the economic growth continued to be one of the most macroeconomic problems. Similarly, Ahmed (2010) maintains that this relationship has been argued in various economic literatures and these arguments shown differences in relation with the condition of world economy order. In accordance with these policies, increases in the total demand caused increases in production and inflation too. However, inflation was not regarded as a problem in that period rather considered as a positive impact on the economic growth which was widely accepted. Amid these views, Phillips first introduced hypothesizes that high inflation positively affects the economic growth by lowering unemployment rates.
1.2 STATEMENT OF THE PROBLEM
As far as Nigeria concerns regarding inflationary effects it has been experienced worst consequences reflected by poverty, food crises, price hike etc. Mahmood, Hafeez and Rasheed
(2009) concluded that inflation causes poverty. Day to day increase in prices of commodities especially of non-food items like oil and gas snatch money from savings of consumers and uncertainty of prices, both food and non-food items, generate enthusiasm among people toward earn more and more therefore, people prefer to work over recreation underestimating their Health.
Over work and lack of recreation make them vulnerable particularly of middle class people and they almost fall into lower class. Although, over time work bless money but it causes exertion and lethargic body that charge more expense on health instead upper class people hardly encounter any problem to inflation.
Muoghalu, et.al. (2010) found that the inflation brings negative impact while exports and investment brings positive impact on Nigeria economy and suggested that we should encourage a larger scale of export promotion activities to enhance the economic growth. It will create numerous job opportunities which increase the per-capita earnings and standard of living.
1.3 OBJECTIVES OF THE STUDY
The main aim of the study will be to examine various monetary and fiscal policies that will help sustain the economy of Nigeria with much emphasis on how to reduce inflation and achieve lower cost of living for her citizenry.
Specific objectives of the study will be aimed at:
1. To determine the impact of inflation on the cost of living in Nigeria.
2. To examine the impact of inflation and cost of living on economic growth in Nigeria.
3. To examine what constitutes cost of living, and how it negatively affects economic growth.
4. To recommend to monetary authorities and the government on how inflation and cost of living can be reduced to an acceptable level.
1.4 RESEARCH QUESTIONS
In-order to achieve the stated objectives of the study, the researcher developed the following research questions:
1. Why have all the policies used been unable to reduce inflation and cost of living to an acceptable level?
2. How can the economy of Nigeria be sustainable into the foreseeable future?
3. What are the economic implications of high inflation and higher cost of living on the economy of Nigeria?
1.5 RESEARCH HYPOTHESES
To carry out the study effectively, the following proposed hypotheses have been formulated and will be tested in the course of carrying out the study:
Ho: Inflation has no significant impact on cost of living in Nigeria economy.
H1: Inflation has significant impact on cost of living in Nigeria economy.
Ho: Cost of living has no significant impact on economic growth in Nigeria.
H1: Cost of living has no significant impact on economic growth in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study will be useful to policy makers especially in formulating policies that will reduce inflation growth rate and ensure lower cost of living.
The study will also be useful to monetary houses like central and commercial banks in Nigeria. Findings and recommendations from this study will be of great benefits to financial institutions in Nigeria, as the recommendations if implemented will go a long way in guaranteeing a sustainable and sound economy.
The study when carried out will also be of great benefit to student researchers who have interest in researching more into inflation and cost of living. It will act like a guide to student researchers who may find the recommendations and findings of the study when completed useful.
1.7 METHODOLOGY OF THE STUDY
The analysis to be made in this study shall be based on the time series data for Nigeria which are Gross domestic product, consumer price index, inflation rate and money supply. Due to the linearity nature of the model formulation, ordinary least squares (OLS) estimation method will be employed in obtaining the numerical estimates of the coefficients in the model using statistical software for social science.
The estimation period would be restricted to the period between 1982 and 2012. Secondary data shall be employed in this study. They would be sourced mainly from the publications of the central Bank of Nigeria (CBN) mainly CBN statistical Bulletin, CBN Annual Report, CBN Economic and Financial Review Bullion and the National Bureau of statistics publication of different years.
1.8 SCOPE AND LIMITATION OF THE STUDY
The research work will be centered on the beginning structure, operations and effect of inflation on cost of living in Nigeria economy.
Finance is one of the elements that assist a good research. Financial constraint created difficulties in the process of this research work, however, it did not hinder the research. The study will be for a period of thirty one years data point which is between 1982 to 2012.
The main limitation of this study is time constraint. The time allowed for the completion of this research is not adequate based on recent and contemporary happenings with respect to the impact of inflation on cost of living in Nigeria economy.
1.9 DEFINITION OF TERMS
Cost of living is the cost of maintaining a certain standard of living. Changes in the cost of living over time are often operational zed in a cost of living index. Cost of living calculations are also used to compare the cost of maintaining a certain standard of living in different geographic areas. Differences in cost of living between locations can also be measured in terms of purchasing power parity rates.
Inflation is a persistent increase in the general price level of goods and services in an economy over a period of time. 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
Economic growth: Refers to the increased every time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizen in increasing number and diversity. It is the study process by which productive capacity of the economy is increased every time to bring about rising level in national income.
Economic development: Economic development is a multidimensional process involving the provision of basic needs, acceleration of economic growth reduction of inequality and unemployment, eradication of poverty as well as changes in attitude institution and structure in the economy.
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