PROJECT TOPIC  : IMPACT OF INFLATION ON ECONOMIC GROWTH OF NIGERIA (2011Q1 - 2015Q3) Also available for (1981 - 2013)


The word ‘inflation’ rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects (Imobighe, 2012; Adenuga, et al. 2012). Although, there is no a clear cut relationship between economic growth and inflation (Majumder, 2016), some evidence suggests that moderate inflation helps in economic growth, the overall weight of evidence so far clearly indicated that inflation is inimical to growth (Bawa and Abdullahi, 2012; Omotosho and Doguwa, 2013; Amandeep, 2014). The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years.

Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy (Lipsey and Chrystal, 1995). According to Umaru and Zubairu, (2012) the concept of inflation can be define as a persistence rise in the general price level of broad spectrum of goods and services in a country over a long period of time. They state that Inflation has been intrinsically linked to money, as captured by the often heard maxim “inflation is too much money chasing too few goods”. According to Badreldin (2014), 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. Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation.

Oyakhilomen and Rekwot (2014) traced the history of inflation in Nigeria to the 1960s when “cheap money policy” was adopted by the government to stimulate development after independence. After an appreciable economic performance in the early 1970s, the Nigeria economy witnessed some anxious moment in the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by rapid growth in domestic money supply, exacerbated by the monetization of the earnings from oil (Kumapayi, et al., 2012) and high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level. The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. In this case, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximised, cost should be minimised. One of the main cost is inflation, which has turned into a canker worm eating deep into the nation’s path of economic progress. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. But high inflation rate was again recorded in 2015/2016 when crude oil price at the international market crashed in 2014/2015 and thereby mounted pressure on Naira exchange rate due to dwindling external reserve. As a heavily import-dependent economy, the high import cost pushed up the inflation rate to double digit.

Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level (Rao and Yesigat, 2015). This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability (Ibrahim and Agbaje, 2013; Salam et al, 2006). The effects of inflation on economic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth. As it is generally believed that the attainment of every other macroeconomics goals depend on the maintenance of a stable and low inflation environment (Ajide and Lawanson, 2012; Zahra, 2014).

There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation (Rao and Yesigat, 2015), is positively related to economic growth. Over the years 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 structuralists argue that inflation is crucial for economic growth, the monetarists posit 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 results. In particular, it is generally accepted that inflation has a negative effect on medium and long-term growth (Bruno and Easterly, 1998). Inflation impedes efficient resource allocation by obscuring the signalling role of relative price changes, the most important guide to efficient economic decision-making (Fischer, 1993). Kumapayi et al. (2012) reveals that over the last few decades, high inflation in Nigeria has caused yield on investment to decline while government policy objectives has been adversely affected as the real size of its budget shrinks with rising inflation which has hampered economic growth. Contrarily, Omotosho and Doguwa (2013) found that the periods of high inflation volatility in Nigeria are associated with periods of specific government policy changes, shocks to food prices and lack of coordination between monetary and fiscal policies.
However, most previous studies have focused on the effect of inflation on growth in developed countries while little 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.

The broad objective of this study is to examine inflation in developing countries with the view of ascertaining the effect of inflation on economic growth. The specific objectives of this study are to:
(i) examine the trend of inflation in Nigeria over the years;
(ii) investigate the impact of inflation on the economic growth of Nigeria;
(iii) Explore the effect of inflation on capital formation in Nigeria;
(iv) Examine the influence of inflation on peoples’ consumption;
(v) Suggest visible solutions to the problem of inflation in the country.

This study would be guided by the following research questions:
1. What is the trend of inflation in Nigeria?
2. How does Inflation impact on economic growth in Nigeria?
3. What is the effect of inflation on the level of capital formation in Nigeria?
4. How does inflation affect the consumption expenditure of Nigerian households?

The hypotheses to be tested in the course of this study are stated below:
Hypothesis I
Ho : Inflation does not hinders significantly the economic growth of Nigeria.
H1 : Inflation hinders significantly the economic growth of Nigeria.

Hypothesis II
Ho : Inflation does not hinders significantly capital formation in Nigeria.
H1 : Inflation hinders significantly capital formation in Nigeria.

Hypothesis III
Ho : Inflation does not hinders significantly consumption expenditure of people in Nigeria.
H1 : Inflation hinders significantly consumption expenditure of people in Nigeria.

The analysis to be made in this study shall be based on time series data for Nigeria’s Inflation rate, Federal Government Total Expenditure, Broad Money Supply, Interest rate, Growth Rate of Gross Domestic Product, Gross Domestic Product, Gross Fixed Capital Formation, and Private Consumption Expenditure. Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method was employed in obtaining the numerical estimates of the coefficients in the model using Statistical Software for Social Sciences (SPSS).

Three multiple regression models shall be used in the estimation. The first model would seek to investigate the effect of inflation on the economic growth of Nigeria, the second model seeks to examine the effect of inflation on capital formation (investment) while the third model probe the impact of inflation on private consumption expenditure. The estimation period would be restricted to the period between first quarter of 2011 and third quarter of 2015 due to non-availability of all the needed data. Besides the regression analysis, tables and charts were also used to examine the trend of inflation rate over the years.

Secondary data shall be the basis of data to be used in this study. They would be sourced mainly from the publications of the Central Bank of Nigeria (CBN) namely; CBN Statistical Bulletin, CBN quarterly Statistical Bulletin, CBN Annual Reports, CBN Economic and Financial Review Bullion, and Bureau of Statistics publications. The variables for which data were sourced include: Inflation rate, Federal Government Total Expenditure, Broad Money Supply, Interest rate, Growth Rate of Gross Domestic Product, Gross Domestic Product, Gross Fixed Capital Formation, and Private Consumption Expenditure for the period 2011Q1 to 2015Q3.

A vital component of any move towards macroeconomic stability and growth is an integrated efforts towards price stability. In order to identify the macroeconomic effect of inflation persistence in Nigeria, this study would investigate the impact of inflation on macroeconomic variables such as productivity, investment, and consumption.
This study is significant in the followings ways:
a. it would have a direct effect on the efficiency and effectiveness of the use of policy instruments in the stabilisation of macroeconomic variables to stimulate production and investment.
b. it would reveal the remote and immediate causes of inflation in Nigeria with due consideration to theoretical foundations.
c. it would also provide an explanation for Nigeria’s stunted growth.

This study shall focus on the effect of inflation on economic growth in Nigeria as necessitated by the inflationary pressure generated by recent global economic crisis through the exchange rate sensitivity. Despite various policies that had been formulated and implemented, no meaningful progress has been made in the combat of inflation. Therefore, this study examines not only the effect of inflation on the economic growth, it also investigate its effect on other macroeconomic variables. The effect of inflation on economic growth shall be investigated empirically with the data spanning from 2011Q1 to 2015Q3. This restriction is unavoidable because of the rebasing of economic data from 1990 to 2010 and due to non-availability of all the needed data.

This study shall be divided in five chapters. The research shall commence by providing a background of the subject matter justifying the need for the study in chapter one. Chapter two shall present related literatures concerning inflation, its causes and effects. The research methodology shall be outlined in chapter three, while the data presentation and analyses shall be made in chapter four as well as highlights of the implications of the findings. Concluding comments in chapter five shall reflect on the findings of the study, and recommendations based on the the findings.

Adenuga, I. A., Bello, H. T. and Ejumedia, P. E. (2012) “Is Inflation a purely Monetary Phenomenon? Empirical investigation from Nigeria (1970 –2009)”. European Scientific Journal. Vol. 8, no.17, pp. 236-248.
Ajide, K. B. and Lawanson, O. (2012) “Inflation Thresholds and Economic Growth: Evidence from Nigeria”. Asian Economic and Financial Review. Vol. 2, no. 7, pp. 876-901.
Amandeep, K. (2014) “Inflation and Economic Growth of India”. International Journal of Research in Finance & Marketing. Vol. 4, iss. 1, pp. 34-47.
Badreldin, M. A. (2014) “Inflation and Economic Performance in Sudan: An Analysis Study”. Researchjournali’s Journal of Economics. Vol. 2, no. 3, pp. 1-8.
Bawa, S. and Abdullahi, I. S. (2012) “Threshold Effect of Inflation on Economic Growth in Nigeria”. Central Bank of Nigeria (CBN) Journal of Applied Statistics. Vol. 3, no.1, pp. 43-63.
Bruno, M. and Easterly, W. (1998) “Inflation Crises and Long-Run Growth”. Journal of Monetary Economics. Vol. 41, pp. 3-26.
Doguwa, S. I. (2013) “Inflation and Economic Growth in Nigeria: Detecting the Threshold Level”. CBN Journal of Applied Statistics. Vol. 3, no. 2, pp. 99-124.
Erbaykal, E. and Okuyan, H. A. (2008) “Does Inflation Depress Economic Growth? Evidence from Turkey”. International Research Journal of Finance and Economics. Issue 17, pp. 40-48.
Fischer, S. (1993) “The Role of Macroeconomic Factors in Growth”. Journal of Monetary Economics. Vol. 32, pp. 485-512.
Ibrahim, T. M. and Agbaje, O. M. (2013) “The Relationship between Stock Return and Inflation in Nigeria”. European Scientific Journal. Vol. 9, no.4, pp. 146-157.
Imobighe, M. D. (2012) “The Impact of Inflation and Fiscal Deficit on a growing Economy such as Nigeria”. International Review of Business and Social Sciences. Vol. 1, no. 11, pp. 17-35.
Kumapayi, A. A.; Nana, J. U. and Ohwofasa, B. O. (2012) “Impact of Inflation on Monetary Policy and Economic Development in Nigerian, 1980-2010: Evidence from Empirical Data”. Asian Journal of Empirical Research. Vol. 2, no. 2, pp. 28-39.
Lipsey, R. G. and Chrystal, K. A. (1995) An Introduction to Positive Economics 8th Edition. Oxford: Oxford University Press.
Majumder, S. C. (2016) “Inflation and Its Impacts on Economic Growth of Bangladesh”. American Journal of Marketing Research. Vol. 2, no. 1, pp. 17-26.
Omotosho, B. S. and Doguwa, S. I. (2013) “Understanding the Dynamics of Inflation Volatility in Nigeria: A GARCH Perspective”. CBN Journal of Applied Statistics. Vol. 3, no. 2, pp. 51-74.
Oyakhilomen, O. and Rekwot, G. Z. (2014) “The Relationships of Inflationary Trend, Agricultural Productivity and Economic Growth in Nigeria”. Central Bank of Nigeria (CBN) Journal of Applied Statistics. Vol. 5, no. 1, pp. 35-47.
Rao, P. N. and Yesigat, A. (2015) “Inflation and Economic Growth: Inflation Threshold Level Analysis for Ethiopia”. International Journal of Ethics in Engineering & Management Education. Vol. 2, iss. 5, pp. 1-7.
Umaru, A. and Zubairu, A. A. (2012) “Effect of Inflation on the Growth and Development of the Nigerian Economy (An Empirical Analysis)”. International Journal of Business and Social Science. Vol. 3, no. 10 (Special Issue – May), pp. 183-191.
Salam, M. A., Salam, S. and Feridun M. (2006) “Forecasting Inflation in Developing Nations: The Case of Pakistan”. International Research Journal of Finance and Economics. Issue 3, pp. 138-159.
Zahra, P. (2014) “Effect of Inflation Regimes and threshold on Economic Growth”. Interdisciplinary Journal of Contemporary Research in Business. Vol. 6, no. 6, pp. 88-101.

Project Status
Number of Chapters
Number of Pages
Number of Words
Number of References
Project Level
N10,000 - Ten Thousand Naira (Non-Negotiable)
Abstract, Regression Data and Results are included
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Keywords: inflation, inflation rate, inflation definition, causes of inflation, effects of inflation, economic growth





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