CHAPTER ONE

INTRODUCTION

1.1     BACKGOUND STUDY

Inflation means continuous rise in general price level of goods and services in an economy; and is of primary concern to all stakeholders. Inflation even in the absence of economic shocks, displays the tendency of reproducing itself from one period to the next (see Novaes 1993, Durevall 1999, and Campêlo and Cribari-Neto 2003). In other words, inertial inflation is when prices keep rising because of past inflation, despite the lack of structural reasons for that to happen.

Thus, the importance of inflation is premised on the distortions that high inflation can exert on domestic macroeconomic conditions, with the potential to derail the economy from the path of sustainable economic growth and development. Inflation adversely affects the overall growth, financial sector development and the vulnerable poor segment of the population. It also induces uncertainty, discourages savings, promote consumption, poses serious threat to macroeconomic stability and result in high social costs.

Considering such adverse impacts of inflation on the economy, there is a consensus among the world’s central banks that price stability should be the prime objective of monetary policy. Consequently, the maintenance of price stability continues to be the overriding objective of monetary policy in Nigeria. The emphasis given to price stability in the conduct of monetary policy is with a view to promoting sustainable economic growth and development as well as strengthening the purchasing power of the domestic currency, amongst others. Thus, a good understanding of the factors driving inflation is required.

Nigeria has witnessed high and volatile inflation rates since 1970s. Masha (2000) indicated that the high inflation episodes in the country since the 1970s were largely driven by the growth of money supply and some factors reflecting the structural characteristics of the economy. These factors included climatic conditions, wage increases, the structure of production, currency devaluation and changes in terms of trade. Adenekan and Nwanna (2004) indicated that by 1988 and 1989, inflation had skyrocketed to more than 50 per cent in Nigeria. Furthermore, Bawa and Abdullahi (2012) stated that in spite of the fact that inflation declined to about 7.5 per cent in 1990, it rose to44.8, 57.2 and 57.0 per cent, respectively, in 1992, 1993 and 1994. It reached an all-time high of 72.8 per cent in 1995. This according to Mordi et al (2007) was due to excess money supply, scarce foreign exchange and severe shortages in commodity supply, as well as continual labour and political unrest following the annulment of the June 1993 elections.

Extensive research to address inflationary problems in Nigeria by investigating its main determinants were conducted, with varying results largely pointing to the above factors, depending on the methodology applied and objectives set to achieve, among others. Thus, it is commonplace that the determinants of inflationary pressures in Nigeria are multi-dimensional. There was, however, still no consensus regarding its ultimate source, be it monetary or structural factors. In addition, some authors have estimated the size of inflation inertia in order to give a better guide, on how much, past inflation impacts on determining its current level. Thus, this study added to the literature by varying on the period covered, methodology adopted, variables used, and frequency of data among other factors to analyze inflation rate in Nigeria.

1.2     STATEMENT OF PROBLEM

There is almost a universal consensus that macroeconomics stability, speciality defined as low inflation, is positively related to economic growth. Over the year the question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate (Erbaykal and Okuyan, 2008) while the structuralizes argue that inflation is crucial for economic growth, the monetarist posits that inflation is harmful to economic growth (Doguwa, 2013). Although the debate about the precise relationship between these two variables is still open, the continuing research on this issue has uncovered some important result in particular, it is generally accepted that inflation has a negative effect on medium and long-term growth.

However, most previous studies have focused on the effect of the inflation on growth in developed countries while attention has been paid to developing countries. It is therefore imperative to conduct a research into the effect of inflation on economic growth in developing countries with special focus on Nigeria, which is the main thrust of this study.

1.3     AIM AND OBJECTIVES

This paper aimed to analyze inflation rate in Nigeria as relative to consumer price index. Also, the following specific objectives will be pursued:

1.     To determine the extent of linear relationship between consumer price index and inflation rate.

2.     To build a linear regression model that can be used for prediction and also to investigate the significant of the model.

3.      To test if there is a significance difference in the average consumer price index and inflation rate.

1.4     SIGNIFICANCE OF THE STUDY

This research work is of great important at large. With this we can say the study is significant to the following:

1.     It would have a direct effect on efficiency and effectiveness of the use of policy instrument in the stabilization of microeconomic variables to stimulate production and investment.

2.     It would reveal the remote and immediate causes of inflation rate in Nigeria with due consideration to theoretical foundation.

3.     It would also provide an explanation for Nigerian’s stunted growth.

1.5     SCOPE OF THE SYUDY

The scope of this project work covered the consumer price index and inflation rate in Nigeria from 2010-2017, the data was sourced from the National Bureau of Statistics.

1.6     DEFINATION OF TERMS

Inflation Rate: Inflation refers to the persistent increase in general prices. The rate of inflation has implications for performance of the economy. For instance, higher rates of inflation will reduce aggregate demand, production, unemployment, trade deficits and balance of payments just to mention few. On the other hand, a low and moderate inflation will encourage economic activity particularly production. This in turn will raise gross domestic product (GDP), reduce unemployment, and ease the balance of payment problems (Obi et al., 2009).

Price Index:A price index is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a given region, during a given interval of time. It is used to help to compare how these price relatives, taken as a whole, differ between time periods or geographical locations.

Consumer Price Index:The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The goal of the consumer price index is to measure changes in the cost of living. This it does by taking into cognizance when calculating, various goods a typical consumer will purchase and their prices and calculation is done with respect to a certain year called the base year.

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