THE RELATIONSHIP BETWEEN EXCHANGE RATE FLUCTUATION AND INFLATION IN NIGERIA

Persistent exchange rate fluctuations and inflationary pressures pose significant economic challenges in Nigeria, affecting businesses, households, and overall economic stability. The depreciation of the naira has consistently driven up consumer prices, eroding purchasing power and increasing production costs, particularly for an import-dependent economy like Nigeria. Despite numerous policy interventions, inflation remains a major concern, exacerbated by external shocks and structural weaknesses. Given these challenges, understanding the precise relationship between exchange rate movements and inflation is critical for designing effective monetary and fiscal policies. This study investigates the impact of exchange rate fluctuations on inflation in Nigeria, utilizing the Consumer Price Index (CPI) and the Implicit Price Deflator (IPD) as key inflation indicators. Using a 24-year time series dataset (2000–2024) and the Autoregressive Distributed Lag (ARDL) model, the study establishes a significant long-run relationship between exchange rate depreciation and inflationary pressures. Findings reveal that naira depreciation leads to rising consumer prices, particularly affecting imported goods and overall cost of living. Additionally, money supply and monetary policy rate significantly influence inflation, even though with a slower adjustment process due to structural challenges in Nigeria’s economy. The study also highlights the impact of major macroeconomic events, including the 2008 global financial crisis, the 2016 exchange rate deregulation, the COVID-19 pandemic, and the 2023 exchange rate unification and fuel subsidy removal, on inflation dynamics. The results underscore the need for effective exchange rate management and monetary policies to stabilize inflation and support economic growth in Nigeria.