The Effect of Central Bank Policy on the National Consumer Price Index in Nigeria
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Background of the Study
The National Consumer Price Index (CPI) is a vital indicator of inflation and the cost of living in Nigeria. Central bank policies—particularly those involving interest rate adjustments, liquidity management, and exchange rate interventions—play a crucial role in influencing the CPI by affecting the overall level of prices in the economy (Ibrahim, 2023). The Central Bank of Nigeria (CBN) uses various monetary tools to control the money supply and manage inflationary pressures, thereby ensuring that consumer prices remain relatively stable. Price stability is essential not only for protecting consumer purchasing power but also for fostering a predictable economic environment that supports investment and sustainable growth.
Recent policy measures by the CBN have included modifications to the policy rate and targeted liquidity interventions aimed at curbing inflation. These actions are designed to limit excessive money supply and prevent runaway inflation, which could otherwise lead to significant increases in the CPI (Afolabi, 2024). However, the relationship between central bank policy and the CPI is not straightforward. External factors such as global commodity price fluctuations and domestic supply constraints also play a critical role in shaping inflation dynamics. Understanding how central bank policies translate into CPI outcomes is therefore essential for assessing the effectiveness of monetary policy in Nigeria.
This study aims to examine the effect of central bank policy on the national CPI by analyzing historical data on monetary interventions and inflation rates. The research will evaluate the channels through which policy measures impact consumer prices and identify the factors that hinder or enhance this transmission process. The findings will provide valuable insights into the effectiveness of the CBN’s policies and offer recommendations for improving policy measures to achieve better price stability (Ibrahim, 2023).
Statement of the Problem
Despite ongoing monetary policy interventions by the Central Bank of Nigeria, the national CPI remains highly volatile, indicating persistent inflationary pressures. This volatility undermines economic stability by eroding consumer purchasing power and increasing uncertainty among investors. One of the key issues is that central bank policies do not always translate into the intended reduction in inflation. External factors such as fluctuations in global oil prices, coupled with domestic supply-side constraints, often counteract the effects of monetary interventions (Afolabi, 2024).
Furthermore, there is evidence that the transmission mechanism of central bank policy to consumer prices is not fully effective, partly due to structural inefficiencies in the financial system and market distortions. This disconnect between policy intent and inflation outcomes creates challenges for economic planning and undermines the credibility of monetary policy. The lack of a consistent and predictable relationship between central bank actions and CPI trends contributes to an environment of economic instability, complicating efforts to achieve long-term price stability (Ibrahim, 2023).
This study seeks to address these challenges by investigating the causal relationship between central bank policy and the national CPI. The research will analyze the effectiveness of various monetary tools in controlling inflation and identify the key factors that limit their impact. The objective is to provide empirical evidence and policy recommendations that can enhance the transmission of central bank measures to consumer prices, thereby promoting a more stable and predictable inflation environment.
Objectives of the Study
• To assess the impact of central bank policy measures on the national CPI in Nigeria.
• To identify factors influencing the transmission of monetary policy to consumer prices.
• To propose policy recommendations for improving price stability.
Research Questions
• How do central bank policy measures affect the national CPI in Nigeria?
• What factors moderate the relationship between monetary policy and inflation?
• What policy interventions can enhance the effectiveness of central bank measures in stabilizing the CPI?
Research Hypotheses
• H1: Central bank policy measures significantly impact the national CPI in Nigeria.
• H2: Structural inefficiencies in the financial system weaken the transmission of monetary policy to consumer prices.
• H3: Improved policy coordination enhances the effectiveness of central bank interventions in stabilizing the CPI.
Scope and Limitations of the Study
The study focuses on Nigeria’s monetary policy and CPI data from 2020 to 2024, using data from the CBN and national inflation reports. Limitations include external shocks and potential data limitations.
Definitions of Terms
- Central Bank Policy: Actions undertaken by the central bank to control money supply and interest rates.
- Consumer Price Index (CPI): A measure that tracks the average change in prices of a basket of consumer goods and services.
- Inflation: The rate at which the general level of prices for goods and services rises.
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