Energy Price Inflation, Exchange Rate Volatility, and Food Price Inflation in Nigeria: Evidence from a Vector Error Correction Model, 1987–2024

ABSTRACT: This study examines the impact of energy price inflation and exchange rate volatility on food price inflation in Nigeria over the period 1987–2024, controlling for GDP per capita. Annual time series data were sourced from the Central Bank of Nigeria, the National Bureau of Statistics, and the World Bank. Augmented Dickey–Fuller and Phillips–Perron unit root tests indicated that the series are predominantly integrated of order one, and Johansen’s trace and maximum-eigenvalue tests confirmed the presence of a cointegrating relationship among the variables. A Vector Error Correction Model (VECM) was therefore estimated to capture both long-run equilibrium dynamics and short-run adjustment. The normalized cointegrating vector shows that, once correctly signed, energy price inflation and exchange rate depreciation both exert positive and statistically significant long-run effects on food price inflation — consistent with costpush inflation theory and purchasing power parity — while GDP per capita exerts no significant long-run effect. The energy coefficient exceeds the exchange rate coefficient by roughly a factor of nine, identifying the domestic energy cost channel as the dominant transmission mechanism. None of the short-run coefficients on energy price inflation or the exchange rate were statistically significant, suggesting that these channels operate primarily through long-run equilibrium adjustment rather than immediate pass-through. The error correction term was negative and highly significant at −0.68, implying that approximately 68 percent of any deviation from long-run equilibrium is corrected within a single year. VEC Granger causality tests found no significant shortrun causal feedback among the variables.