Given that this is an extension of my essay on the naira devaluation and the exchange rate mechanism, I shall take the liberty of introducing today’s topic in a similar manner. Many Nigerians share the sentiment of disconnect between the published inflation numbers and the economic reality in the country today. Seemingly each month, the National Bureau of Statistics (NBS) publishes downward trending inflation figures which prompts people to question the accuracy of these published figures. Some go so far as to claim that actual inflation numbers are up to 20 percent higher than the published ones. I believe that at least some of this perceived disconnect can be explained by a lack of understanding of what inflation really is and what the published figures really mean.
I would be remiss not to state that it is possible and indeed likely for your personal inflation rate to be different from the published numbers. This happens because the NBS calculates inflation numbers based on the change in the price level of a basket of goods thought to be representative of the consumption of individuals and households within the Nigerian economy. As an individual though, it is highly unlikely that your consumption perfectly matches the consumption of your next door neighbour let alone the national average. In fact, inflation rates recorded in different states across the country often differ significantly from each other as well as from the national level.
That said, it is reasonable to expect the trend in the aggregate rate of inflation and in your personal rate of inflation to be similar. So why might it seem like prices are getting higher for you while aggregate inflation numbers trend lower. The short answer is that a decline in the rate of inflation (disinflation) is not the same as a decline in the general price level (deflation). While inflation trends downwards, prices are still rising, just at a slower pace.
In the next section, I examine historical data on Nigerian inflation in order to find out where the country has been before, where it is now, and what that can tell us about where it might be headed.
Data from: World Bank
The figure above shows the annual inflation rate based on the consumer price index in Nigeria from 1960 to 2025 along with a dashed line indicating the median rate of inflation over the period.
| Min. | 25% | Median | 75% | Max. | |
|---|---|---|---|---|---|
| Inflation Rate | -3.73 | 7.79 | 12.38 | 18.60 | 72.84 |
Since 1960, the inflation rate in Nigeria has eclipsed 30 percent only a handful of times. The first was in 1975 when inflation came in at 33.96%. This was followed by a two-year stretch in 1988 and 1989 with inflation at 54.51% and 50.47% respectively. Then the four-year period from 1992 to 1995 when the country recorded inflation rates of 44.59%, 57.17%, 57.03% and 72.84% in consecutive years. And finally, 2024 – when average inflation was announced as 33.24% for the year. Average inflation came in at 23.01% in 2025 and I expect it to settle somewhere around 15.5% come the end of 2026.
Data from: World Bank, Central Bank of Nigeria
Figure 2 shows the relationship between the rate of M2 money supply growth and the inflation rate in the long run. Each point represents each of the past six decades (from 1966 to 2025) and comprises the annualised growth rate of M2 money supply on the x-axis and annualised percent change in the consumer price index on the y-axis. The quantity theory of money exposes the positive relationship between the rate of money growth in an economy and the inflation rate. For the period in question, we observe a correlation of 0.58 which is in line with the theory. This establishes the link between inflation and money growth and will be relevant to us later.
Now, in 2026, Nigerian inflation is well on its way back towards the median level. At this point, it is not necessarily incorrect to say that inflation is back to normal, yet it is also not incorrect to say that inflation is still high. While “normal” inflation in Nigeria is rather high, inflation is not inherently bad. To be clear, there are certain costs that arise solely as a result of inflation. However, inflation may also exist as a consequence of a thriving economy. When there is very high willingness and ability to pay for goods and services in an economy, the result is inflation.
Unfortunately, most would not say that this is the kind of inflation Nigeria is currently experiencing. The growth in the overall price level in Nigeria is mostly driven by surging costs as opposed to surging demand. Indeed, many others have already identified several drivers behind the inflationary environment in Nigeria. These include: transportation and energy costs, which are affected by crude oil prices; agricultural supply bottlenecks stemming from insecurity; tax and tariff policies; and the depreciation of the naira, to name a few. All of these are worth examining in their own right. However, I would like to dedicate the rest of this essay to the last-named factor: the depreciation of the naira.
Data from: Central Bank of Nigeria, Investing.com
Figure 3 shows the year-over-year percent change in the naira per US dollar exchange rate as well as the year-over-year percent change in the consumer price index for Nigeria from 2003 to 2025. The correlation coefficient between these two variables over this period was 0.79. In contrast, money growth and inflation had a correlation of 0.39 over the same period – weaker than the long-run correlation of 0.58. Theoretically, we have reason to believe that the depreciation of the naira was a major factor behind the rise in the general price level. This is not a difficult concept to explain, as if every unit of the naira gets you fewer dollars, then 100 dollars worth of goods suddenly requires more naira to purchase. Despite its straightforwardness, I pay special attention to currency depreciation due to how significant yet misunderstood it is.
Read my essay on Naira Devaluation and the Exchange Rate Mechanism to see why the naira depreciation had to happen.
To grasp the significance of the naira depreciation to the inflation rate in Nigeria, we take a look at the regression models below.
Dependent variable: Inflation Rate
| Model 1 (Short-run) | Model 2 (Short-run) | Model 3 (Long-run) | |
|---|---|---|---|
| Naira Depreciation | 0.209*** (0.035) | ||
| M2 Money Growth | 0.172* (0.086) | 2.452* (0.871) | |
| Real GDP Growth | -0.460 (0.391) | -2.385* (1.009) | |
| Intercept | 11.892*** (1.020) | 12.892*** (2.772) | -31.827 (19.374) |
| SER | 4.333 | 6.480 | 5.877 |
| R2 | 0.609 | 0.126 | 0.616 |
Models 1 and 2 are based on annual data from 2003 to 2025 while Model 3 is based on annualised decade-long data for the six decades between 1966 and 2025. Model 1 shows a statistically significant positive relationship between currency depreciation and inflation. Models 2 and 3 show a positive relationship between money growth and inflation that is significant at the 90% confidence level. Both Model 2 and 3 show a negative relationship between output growth and inflation however only Model 3 shows a relationship that is significant at the 90% confidence level.
The long-run model based on money supply and output has an adjusted r-squared of 0.62 while the short-run model performs much poorer with an adjusted r-squared of 0.13. Thus, the model based on currency depreciation, with an adjusted r-squared of 0.61, does a much better job explaining the short-run trends in inflation. From my point of view, currency depreciation being a major factor in the current inflationary environment in Nigeria is actually a good thing. As I mention in the essay on the exchange rate mechanism, I believe that the 2023 FX reforms have been successful in instituting an effective exchange rate regime. This means lower exchange rate volatility going forward and therefore lower imported inflation, all else being equal.
It seems that Nigeria is finally in a good place with regard to foreign exchange and monetary policy. Prudent management will be highly beneficial to continuing the march towards “normal” inflation numbers and even more so to steering the Nigerian economy towards lower long term inflation targets. Achieving lower long term inflation will definitely not be an easy task. External factors like the ongoing crude oil supply shocks will continue to stand as obstacles in the way. Nonetheless, as of right now, it looks like the worst is behind us and this to me is a reason to be optimistic.
Author: Ugonna Onyemere
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