STATISTICAL ANALYSIS OF THE DYNAMICS OF INFLATION ON FOOD ITEMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

By definition, inflation is a persistent and appreciable rise in the general level of prices (Jhingan, 2002). Not every rise in the price level is termed inflation. Therefore, for a rise in the general price level to be considered inflation, such a rise must be constant, enduring and sustained. The rise in the price should affect almost every commodity and should not be temporal.

But Demberg and McDougall are more explicit referring to inflation as a continuing rise in prices as measured by an index such as the Consumer Price Index (CPI) or by the implicit price deflator for Gross National Product (Jhingan 2002).

In an inflationary economy, it is difficult for the national currency to act as medium of exchange and a store of value without having an adverse effect on income distribution, output and employment (CBN, 1984). Inflation is characterized by a fall in the value of the country’s currency and a rise in her exchange rate with other nation’s currencies.

Price can be observed as an aggregate that has close interface and a continuous relation with real macroeconomic aggregate. Also, price increase in one sector of an economy can easily be transmitted to other sectors. And most often, the responsiveness of other sector may not be entirely proportionate. Given this inter-relationship therefore, an accurate evaluation of effects of government policy measures on diverse sectors and aggregate vis-à-vis inflationary consequences cannot be adequately and readily ascertained. It is within this context that the present study becomes highly important.

Exchange Rate in finance also known as a foreign-exchange rate between two currencies is the rate at which one currency will be exchange for another. It is also regarded as the value of one country’s currency in terms of another currency. Exchange rates are determined in the foreign exchange market which is open to a wide range of different types of buyers and sellers and where currency trading is continuous: 24hours a day except weekends. This research work also used exchange rate of dollar (USD) as one of the considering factors in the dynamics of inflation on food items in Nigeria.

Though inflation rate is not new in the Nigerian economic history, the recent rates of inflation have been a cause of great concern to many. During the period under review (1997–2015), there has been an upsurge in the inflationary rates leading to major economic distortions.

The continued devaluation of naira led to a fall in agricultural outputs as machines and raw materials (mostly imported) were out of reach. The devaluation reduced the aggregate real income and aggregate demand and at the same time raised the naira prices of goods whose production depended heavily on imported goods. Also the removal of fuel subsidy and the increase in money supply have really increased the standard of living of the economy and as well increased the food inflation rate.

Therefore, the study is intended to x-ray (multi dimensional and dynamic) sources of inflationary trends on food items in Nigeria, which includes crude oil price, money supply and exchange rate.

The general objective of this research is to find the most suitable explanatory variable among the variables with a focus on the relationship and examine the nature of relationship between crude oil price, money supply, exchange rate and consumer price index as dynamics of inflation on food items in Nigeria.

The specific objective of this study will include:

This will be our guide in achieving our set of objectives. The aim of the Multiple Regression is to choose between the claim that there is relationship that exists between the dynamics of inflation on food (consumer Price Index, Crude Oil Price, Money Supply and Exchange Rate) and the claim that they is no relationship that exists between the dynamics of inflation on food items in Nigeria.

H₀: There is a relationship that exists between Consumer Price Index,

Crude Oil Price, Money Supply and Exchange rate

H₁: There is no relationship that exists between Consumer Price Index, Crude Oil Price, Money Supply and Exchange rate.

The principal benefits of this research are as follows:

The scope of any research work is to give an account of the extent of its coverage. In this research work it covers dynamics of inflation on food items in Nigeria which includes; crude oil price (petroleum), money supply (currency in circulation), exchange rate (US Dollar) and consumer price index (CPI) in Nigeria from 1997 – 2015.

1.9 DEFINITION OF TERMS

- Macroeconomics: This is a branch of the economics field that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as, inflation, price levels, rate of growth, national income, gross domestic product and changes in unemployment.

- Monetary Policy: This is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

- GDP Deflator (Implicit Price Deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.

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