Oil Price Shock and Inflation in Nigeria

This study investigates the impact of oil price shocks on inflation in Nigeria over the period 1990 to 2025. Oil price shock is proxied using crude oil price, oil price volatility, and oil price shock indicators, while inflation is measured by the consumer price index (CPI). The exchange rate is incorporated as a control variable. Data were sourced from the World Bank’s World Development Indicators (WDI) and analyzed using the Augmented Dickey Fuller (ADF) unit root test and the Auto-Regressive Distributed Lag (ARDL) framework to establish stationarity and long-run relationships. The bounds test results confirm the existence of a long-run relationship between oil price dynamics and inflation. Empirical findings reveal that oil price volatility and exchange rate exert a positive and statistically significant influence on inflation, indicating that fluctuations in oil prices and currency depreciation are key drivers of price instability in Nigeria. In contrast, crude oil price shows a positive but insignificant relationship with inflation, while oil price shock exhibits a negative and insignificant effect on the consumer price index. The study concludes that although oil price shocks are relevant in explaining long-run inflationary trends, their direct short-run impact is limited. Consequently, the study recommends that the Central Bank of Nigeria should adopt a balanced and forward-looking monetary policy framework, focusing more on domestic monetary conditions, such as money supply and interest rates, rather than overreacting to temporary oil price shocks.