THE INFLUENCE OF INFLATION ON ECONOMIC DEVELOPMENT IN NIGERIA

1.1 Introduction

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. Money is a medium of exchange for goods and services and the strength and stability of the purchasing power of money can be affected by inflation which influences the ability of individuals to acquire goods and services (Jacobs, Perera & Williams 2014). Inflation, simply put is the continuous fall in the purchasing value of money such that more money chases fewer goods and services which adversely impacts the economy. Inflation rate can influence the standard of living of the population. Once inflation exceeds its required threshold, regulators deploy policy instruments to control and cushion its effects on the population as part of the broad macroeconomic stabilization objectives.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

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1.2 Background of Study

Inflation has become a leading topic of discussion in Nigerian families and other countries of the world. The press as its effect penetrates more deeply into the nation’s life. It has become something of a platitude to say that sharp, continuous increase in price is among the serious economic problems of our time. Indeed, the problem is so great that unless it is brought under control, inflation will destroy the very fabric of our societies. Inflation can have positive and negative impact on the economic performance of an economy. Positively, inflation can lead to a higher sustained growth due to the effect it has on capital accumulation. Also, through its negative impact on productivity in an economy, inflation results in adverse effects on economic growth.

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 consequences.

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 Nigeria.

The problem created by the rising prices of goods and services leading to higher 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.

Some researchers advocated that, inflation can lead to uncertainty about the future profitability of investment project. Hence this lead to more conservative investment strategies than would otherwise by the case, ultimately leading to lower levels of investment and economic growth. Khan (2002), concurs that inflation may also reduce a country’s international competitiveness, by making its exports relatively more expensive, thus impacting negatively on the balance of payments. In addition, budget deficits also reduce both capital accumulation and productivity growth. On the contrary, some theories advocated that there is a positive relationship between inflation and economic growth. Various macro-economic policies notably fiscal, monetary and exchange rate had from time to time been adopted to address this problem of inflation. Unfortunately, these measures have met with little or no success and this has hindered the achievement of other macro-economic objectives such as economic growth, increase in employment, satisfactory balance of payments and equitable income distribution.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Influence of Inflation on Economic Development in Nigeria.

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1.3 Statement of Problems

Investigation revealed that 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 their Health.

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.

Muoghalu 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.

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1.4 Aim and Objectives of Study

The aim of the study is to investigate the Influence of Inflation on Economic Development in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the effect of inflation on the economic growth of Nigeria.
2. To find out whether inflation targeting would achieve a better economic growth of Nigeria.
3. To investigate the relationship between inflation and economic growth in Nigeria.
4. To analyze the trend of inflation and economic growth in the country over the years.
5. To suggest, on the basis of the findings, policy recommendation for effective control of inflation in Nigeria.

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1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Does targeting inflation leads to the achievement of a better economic growth of Nigeria?
• What is the effect of inflation on the economic growth of Nigeria?
• What is the relationship between inflation and economic growth in Nigeria?
• What is the trend of inflation and economic growth in the country over the years?

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1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Inflation has no significant impact on cost of living in Nigeria economy.
• H1: Inflation has significant impact on cost of living in Nigeria economy.

Hypothesis Two

• H0: There is no significant relationship between inflation and economic growth in Nigeria.
• H1: There is a significant relationship between inflation and economic growth in Nigeria.

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1.7 Significance of Study

This study is of significance in three respects, namely;

1. It would assist monetary authorities to appreciate variables that impact on Nigeria inflation, with a view to managing such variables appropriately and effective;
2. The recommendations, based on the finds are expected to assist the government in finding a lasting solution to the problem of inflation in Nigeria.

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 useful.

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1.8 Scope of the Study

The scope of the research is focused on the Impact of Inflation on Economic Development in Nigeria.

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1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time allowed for the completion of this research is not adequate based on recent and contemporary happenings with respect to the Influence of Inflation on Economic Development in Nigeria.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

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1.10 Definition of Terms

Inflation: Inflation is a persistent increase in the general price level of goods and services in an economy over a period of time.

Economic Growth: Refers to the increased every time of an economy's capacity to produce those goods and services needed to improve the well-being of the citizen in increasing number and diversity.