THE IMPACT OF INFLATION ON PRIVATE CONSUMPTION EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study empirically examine the impact of inflation on private consumption expenditure and economic growth in Nigeria using an annual time series data spanning from 1981-2012. In this study, modern time series econometric methodology such as Unit Root Testing, Johansson Co-integration test, Vector error co-integration granger causality test(VEC)  and Vector Error Correction Model (VECM) where employed to model both the long run  and  short  run  relationships  between  inflation, economic growth, interest rate as (explanatory variables) and private consumption expenditure as (dependent variable). Augmented Dickey- Fuller (ADF) and Phillips–Perron (PP) test were conducted and the results show that all the data are not stationary at a level but after the first difference they become stationary. The Johansson co-integration test indicates that there exists a long run relationship between the variables for the period of study. However, the VEC Granger Causality result shows that inflation is positively granger causes private consumption expenditure for the period of study and there happens to be no causality flowing from inflation to economic growth, neither is there causality from economic growth to inflation in the short run. However, the long-run model result shows a negative impact of inflation on economic growth for the study period. It implies that I per cent increase in inflation will result in 0.69 decreases in economic performance (RGDP). It  could therefore be recommended that Government together  with the central Bank of Nigeria   should develop and pursue prudent monetary and  fiscal  policies  that  would  aim  at  reducing  and  stabilizing  both  the  micro  and macroeconomic indicators especially inflation targeting, so as to boast the growth of the economy.