How Distortionary are Oil Price Shocks to Consumer Prices? Empirical Evidence from Nigeria Using Dynamic Co-Integration Models

Abstract

This paper examines the response of consumer prices to the oil price shocks in Nigeria. The current oil price slump and its slowness to rise for giving hope to economic recovery pose a threat to many oil-backed economies, particularly Nigeria. As such, oil price and consumer price index are modelled, based on dynamic error-correction models, with aim to capture asymmetric response of consumer prices to a change in oil price. Quarterly time series data spanned from 2001Q1 to 2016Q4 were obtained and analyzed using dynamic co-integration method which allows for asymmetric adjustments. Our results revealed that three disaggregated consumer prices exhibit some degree of persistence to their long-run values, however, their responses are faster to a rise than to a fall in oil price. Correspondingly, aggregate price is found to be rigid downward, suggesting high prices of consumer commodities in Nigeria. This serves as a confirmation that low oil price is likely attributed to the high costs of basic consumer commodities in Nigeria, perhaps due to subsidy removal. We thus recommend that a credible price stabilization policy should be designed to curb the price-increasing effect that an oil price downturn may have on consumer commodities, such target should specifically focus on food and beverages, clothing, and energy prices.