Does the Expected Crude Oil Price Influence Inflation in Nigeria?

Abstract

The study examined the influence of expected oil price on inflation rate with the view of understanding the behavior of inflation as a result of shocks on the expected crude oil prices in Nigeria. The study employed an Autoregressive Distributed lag (ARDL) and Bound testing cointegration approach in order to examine both the short-run and the long-run effects of the variables. The estimation result shows that expected oil price has a significant and positive effect on inflation both in the long-run and short-run in Nigeria. Surprisingly, in the long-run, interest rate has a positive and significant effect on inflation rate as against apriori expectations. It is therefore recommended that the Nigerian government diversify its resource base, and rely less on crude oil that is more susceptible to oil price shocks, thereby reducing the effects of oil price on inflation in Nigeria. Secondly, the monetary authorities may need to use an effective interest rate policy to control the inflation rate, which in turn will stimulate investment.