THE ROLE OF PREMIUM MOTOR SPIRIT PRICES AND EXCHANGE RATE IN NIGERIA'S INFLATION DYNAMICS

This study examines the impact of energy prices, exchange rate fluctuations, and monetary policy on inflation dynamics in Nigeria over the period 1985–2024. Motivated by persistent inflationary pressures and the structural policy shift following the 2023 fuel subsidy removal, the study focuses specifically on Premium Motor Spirit (PMS) prices as a key driver of costpush inflation. The Autoregressive Distributed Lag (ARDL) model is employed to capture both short-run and long-run relationships among inflation, PMS prices, exchange rate, monetary policy rate, and real GDP. The Bounds test confirms the existence of a long-run equilibrium relationship among the variables. Empirical results reveal that PMS prices and exchange rate depreciation have significant and positive effects on inflation in the long run, while the monetary policy rate reduces inflation. Real GDP has a dual effect: it reduces inflation in the short run but increases it in the long run. The error correction term indicates a moderate speed of adjustment. Robustness analysis using Vector Autoregression (VAR), impulse response functions (IRFs), and variance decomposition (VDC) confirms the dominance of exchange rate and energy price shocks in explaining inflation dynamics. The study concludes that inflation in Nigeria is largely driven by structural and external factors, and recommends coordinated monetary and structural policy interventions.