Energy Price Shocks and Inflationary Echoes in Nigeria: A Structural VAR Approach
Keywords:
Energy Price Shocks, Oil Price, Automotive Gas Oil Price, Food Inflation, Headline InflationAbstract
This study assessed whether energy price shocks (in the form of crude oil price and automotive gas oil price) have inflationary or disinflationary effect, with particularly interest in headline inflation, for the monthly period from June 2015 to November 2025. In our methodological framework, we developed a structural vector autoregressive (SVAR) model of 6 variables with the ordering: Brent crude oil price (OLP), external reserves (ERS), exchange rate (ECH), automotive gas oil (AGO) price, food inflation (FCPI) and headline inflation (HCPI). The impulse response function (IRF) was applied to get an understanding of how HCPI response to OLP shock, ERS shock, ECH shock, AGO price shock, FCPI shock and own (HCPI) shock. We obtain empirical evidence of an unexpected rise in crude oil price inducing inflationary pressures. In terms of ECH, AGO price and FCPI shocks, the IRF suggests that exchange rate depreciation, AGO price hikes and increase in food prices lead to substantial inflation upswings. An application of FEVD analysis reveal that FCPI shock explains approximately 42 – 74% of headline inflation dynamics in Nigeria. Furthermore, OLP and AGO price shocks to headline price hikes, respectively. To ease and reverse the inflationary effects of FCPI, OLP and AGO price shocks, the study recommends aggressive and strategic collaborative combat operations in the North-East/Central region of Nigeria to improve security conditions and transition to renewable energy sources, facilitated by an advanced and developed financial sector.
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