BACKGROUND TO THE STUDY
Inflation is an inevitable property of
any economy in the world. It influences every country, negatively as well as
positively, whether it is developed or developing country as well. Anyanwu
(2011) stated that inflation is an important factor leading to social and
economic instability and disorder. It is one of the most largely observed and
tested economic variables both theoretically and empirically. Its causes,
impacts on other economic variables, and cost to the overall economy are well
known and understood.Nigeria, being a developing country, could not overcome
the continuously year to year climbing up inflation, and also its causes and
After remaining relatively low for quite a long
time, the inflation rate in Nigeria started to accelerate in late 2003 . The
role of money supply appears significant in influencing food price inflation in
Nigeria (Anyanwu, 2011).which disturbed family budget as well as consumer’s
purchasing power. People struggled in order to maintain their living standard
but it slumped down gradually. Many authors have written on the impacts of
inflation and cost of living on the Nigerian economy, but the authors have
different views, nevertheless, one common thing is that all the authors agree
that inflation and cost of living have various impacts on the economy of
The problem created by the rising prices of goods
and services leading to higer cost of living has become too difficult for the
government to solve. During inflationary period, fixed amounts of money buy less
quantity of goods and services. The real value of money is drastically reduced
i.e the purchasing power of consumers are reduced.
attain sustainable economic growth coupled with price stability continues to be
the central objective of macroeconomic policies for most countries in the world
today. Among others the emphasis given to price stability in conduct of
monetary policy is with a view to promoting sustainable economic growth as well
as strengthening the purchasing power of the domestic currency (Umaru and
Zubairu, 2012). The question on whether or not inflation is harmful to economic
growth has recently been a subject of intense debate to policy makers and macro
economists. Several studies have estimated a negative relationship between
inflation and economic growth. Specifically the bone of contention is that
whether inflation is necessary for economic growth or it is detrimental to
growth. Basically the rate of economic growth depends primarily on the rate of
capital formation and the rate of capital formation depends on the rate of
savings and investment (Datta and Kumar, 2011). World economic growth and
inflation rates have been fluctuating. Likewise, inflation rates have been
dominating to compare with growth rates in virtually many years (Madhukar and
Nagarjuna, 2011) and relationship between inflation and the economic growth
continued to be one of the most macroeconomic problems. Similarly, Ahmed (2010)
maintains that this relationship has been argued in various economic
literatures and these arguments shown differences in relation with the
condition of world economy order. In accordance with these policies, increases
in the total demand caused increases in production and inflation too. However,
inflation was not regarded as a problem in that period rather considered as a
positive impact on the economic growth which was widely accepted. Amid these
views, Phillips first introduced hypothesizes that high inflation positively
affects the economic growth by lowering unemployment rates.
STATEMENT OF THE PROBLEM
As far as Nigeria concerns regarding
inflationary effects it has been experienced worst consequences reflected by
poverty, food crises, price hike etc. Mahmood, Hafeez and Rasheed
(2009) concluded that inflation causes
poverty. Day to day increase in prices of commodities especially of non-food
items like oil and gas snatch money from savings of consumers and uncertainty
of prices, both food and non-food items, generate enthusiasm among people
toward earn more and more therefore, people prefer to work over recreation underestimating
Over work and lack of recreation make
them vulnerable particularly of middle class people and they almost fall into
lower class. Although, over time work bless money but it causes exertion and
lethargic body that charge more expense on health instead upper class people
hardly encounter any problem to inflation.
et.al. (2010) found that the inflation brings negative impact while exports and
investment brings positive impact on Nigeria economy and suggested that we
should encourage a larger scale of export promotion activities to enhance the
economic growth. It will create numerous job opportunities which increase the
per-capita earnings and standard of living.
OBJECTIVES OF THE STUDY
The main aim of the study will be to examine various
monetary and fiscal policies that will help sustain the economy of Nigeria with
much emphasis on how to reduce inflation and achieve lower cost of living for
Specific objectives of the study will be aimed at:
determine the impact of inflation on the cost of living in Nigeria.
examine the impact of inflation and cost of living on economic growth in
examine what constitutes cost of living, and how it negatively affects economic
recommend to monetary authorities and the government on how inflation and cost
of living can be reduced to an acceptable level.
In-order to achieve the stated objectives of the
study, the researcher developed the following research questions:
have all the policies used been unable to reduce inflation and cost of living
to an acceptable level?
can the economy of Nigeria be sustainable into the foreseeable future?
are the economic implications of high inflation and higher cost of living on the
economy of Nigeria?
To carry out the study effectively, the following
proposed hypotheses have been formulated and will be tested in the course of
carrying out the study:
Ho: Inflation has no significant impact on cost of
living in Nigeria economy.
H1: Inflation has significant impact on cost of
living in Nigeria economy.
Ho: Cost of living has no significant impact on
economic growth in Nigeria.
H1: Cost of living has no significant impact on
economic growth in Nigeria.
SIGNIFICANCE OF THE STUDY
The study will be useful to policy makers especially
in formulating policies that will reduce inflation growth rate and ensure lower
cost of living.
The study will also be useful to monetary houses
like central and commercial banks in Nigeria. Findings and recommendations from
this study will be of great benefits to financial institutions in Nigeria, as
the recommendations if implemented will go a long way in guaranteeing a
sustainable and sound economy.
The study when carried out will also be of great
benefit to student researchers who have interest in researching more into
inflation and cost of living. It will act like a guide to student researchers
who may find the recommendations and findings of the study when completed
1.7 METHODOLOGY OF THE STUDY
analysis to be made in this study shall be based on the time series data for
Nigeria which are Gross domestic product, consumer price index, inflation rate
and money supply. Due to the linearity nature
of the model formulation, ordinary least squares (OLS) estimation method will
be employed in obtaining the numerical estimates of the coefficients in the
model using statistical software for social science.
estimation period would be restricted to the period between 1982 and 2012.
Secondary data shall be employed in this study. They would be sourced mainly
from the publications of the central Bank of Nigeria (CBN) mainly CBN
statistical Bulletin, CBN Annual Report, CBN Economic and Financial Review
Bullion and the National Bureau of statistics publication of different years.
1.8 SCOPE AND LIMITATION OF THE STUDY
research work will be centered on the beginning structure, operations and
effect of inflation on cost of living in
is one of the elements that assist a good research. Financial constraint
created difficulties in the process of this research work, however, it did not
hinder the research. The study will be for a period of thirty one years data
point which is between 1982 to 2012.
main limitation of this study is time constraint. The time allowed for the
completion of this research is not adequate based on recent and contemporary
happenings with respect to the impact of inflation on cost of living in Nigeria