Inflation Dynamics in Nigeria: Implications for Monetary Policy Response

Abstract

This study is an investigation into the appropriate price index that the monetary authority in Nigeria should monitor to ensure stable price level. It employed univariate autoregressive model to determine the persistence of headline, food (noncore) and nonfood (core) inflation and impulse response  function to determine the transmission effects between food and nonfood inflation.  The results showed that headline, food and nonfood inflation are persistent but headline inflation was shown to have highest level of persistence, followed by food inflation.  The fact that food inflation shows more persistence than nonfood is an indication that it transmits more shock to nonfood inflation than nonfood to food inflation. The impulse response function results showed that shocks from food inflation to nonfood are not only larger than shocks from nonfood to food but are also contemporaneous and as well have longer memory. This is an indication that food inflation is a vital component of price index in Nigeria. Therefore using headline inflation as the underlying inflation by the CBN is appropriate.

Keywords: Inflation Dynamics, univariate autoregressive, impulse response, headline inflation