PETROLEUM PRICE DYNAMICS AND INFLATION IN NIGERIA: A GRANGER CAUSALITY ANALYSIS 1990-2023

Abstract

Persistent inflation threatens Nigeria's economic stability, eroding purchasing power and increasing financial uncertainty. Considering the nation's dependence on petroleum products, comprehending their impact on inflation is crucial for effective policy formulation. This research investigates the causal relationship between domestic petroleum product prices and inflation in Nigeria using the Granger Causality/Block Exogeneity Wald Tests developed by Toda and Yamamoto (1995). An ex post facto research design was applied, utilising time series data from 1990 to 2023, sourced from Bobai's (2012) study, the 2018 Nigerian Oil and Gas Industry Annual Report, National Bureau of Statistics (NBS) (2019–2023), and the Central Bank of Nigeria (CBN). Findings reveal a unidirectional causal link between
Automotive Gas Oil (AGO) prices and inflation, indicating that AGO price fluctuations directly affect inflation rates. However, no significant causal relationship exists between inflation and the pricing of Dual-Purpose Kerosene (DPK) or Premium Motor Spirit (PMS). The study also identifies a unidirectional causal link from the Real Effective Exchange Rate (REER) to inflation, underscoring the importance of exchange rate management in controlling inflation. These findings highlight the need for targeted regulatory measures in the AGO market and sound exchange rate policies to curb inflation and ensure economic stability.