INTRODUCTION

Fuel subsidy policies have been a central feature of Nigeria’s energy and fiscal landscape for decades, designed to make petroleum products more affordable for consumers and to support domestic economic stability. The removal or reduction of fuel subsidies, however, has frequently sparked intense public debate due to its potential impact on prices, household welfare, and macroeconomic outcomes. Globally, subsidy reforms are known to influence inflationary pressures because they directly alter the cost of fuel, which is a key input in transportation, manufacturing, and energy-dependent sectors (International Monetary Fund, 2023; World Bank, 2023). In Nigeria, where petroleum products account for a significant share of household and industrial energy consumption, changes in fuel subsidy policies have direct implications for the Consumer Price Index (CPI) and overall inflation dynamics (Adegbite & Olawale, 2022; Okonkwo, Eze & Adigwe, 2023).

Fuel subsidy removal refers to the partial or total discontinuation of government support that keeps domestic fuel prices below international market levels. Recent studies, including Ajayi (2022), Olatunji and Ibrahim (2023), and Oladipo (2022), define it as the elimination of artificially maintained price differences that reduce the financial burden on consumers but increase government expenditure. The effect of removing such subsidies is multifaceted: while it reduces fiscal strain and allows governments to reallocate resources to productive sectors, it also raises fuel prices, contributing to inflationary pressures through higher transportation and production costs. Empirical evidence suggests that subsidy removal can trigger both immediate and medium-term inflationary effects, depending on the efficiency of accompanying monetary and fiscal measures (IMF, 2023; World Bank, 2023; Ajayi, 2022).

In Nigeria, the fuel subsidy regime has historically placed significant pressure on government finances, with subsidy expenditures reaching over ₦3.5 trillion in 2024 alone, equivalent to a substantial portion of the federal budget (Central Bank of Nigeria, 2024; National Bureau of Statistics, 2025). These expenditures often divert funds from critical sectors such as education, health, and infrastructure, while the delayed or inconsistent implementation of subsidy reforms creates uncertainty in fuel pricing and inflation management. For instance, in periods when subsidy removal policies were partially implemented, the consumer price index recorded increases of 4.8% to 6.3% in transportation and energy-related goods, demonstrating a clear link between subsidy policy and inflationary dynamics (NBS, 2025; Okonkwo, Eze & Adigwe, 2023). Such variability highlights the structural challenges faced by Nigeria in balancing fiscal sustainability with household welfare and price stability.

The problem is further compounded by inconsistent policy implementation and external shocks in global oil markets. Despite subsidy removal being a mechanism to reduce fiscal pressure, its immediate impact on inflation can undermine public confidence and exacerbate economic hardship, particularly among lower-income households (Oladipo, 2022; Ajayi, 2022). Historically, when subsidy expenditures were high, the government faced budgetary deficits, while partial subsidy removals often generated social resistance and political tension, reflecting the dual challenge of fiscal stabilization and macroeconomic management. Although existing studies have examined the relationship between fuel subsidy policies and inflation, there remains a gap in recent empirical evidence using data through 2025 that captures the combined effects of subsidy removal, crude oil price fluctuations, pump price adjustments, and exchange rate variations on inflation dynamics in Nigeria. Most prior research focuses on either fiscal implications or price effects in isolation, without integrating these variables to provide a comprehensive analysis of the inflationary impact.

It is against this backdrop, the present study seeks to provide empirical answers to the following research questions: To what extent has fuel subsidy expenditure influenced inflation dynamics, as measured by the consumer price index (CPI)? How does the pump price of fuel affect movements in the CPI? What is the nature of the relationship between crude oil prices and inflation dynamics? Furthermore, how has the exchange rate shaped inflationary trends within the economy? Following this introductory section, the remainder of the paper is structured as follows: Section Two presents the review of relevant empirical and theoretical literature; Section Three outlines the methodology adopted for the study; Section Four discusses the empirical results and their implications; while the final section concludes the study and offers policy recommendations.

LITERATURE REVIEW

Fuel Subsidy Removal

Fuel subsidy removal refers to the deliberate policy action by a government to eliminate or reduce financial support provided to petroleum products, particularly petrol, kerosene, and diesel, that keeps retail prices below the market-determined level. Subsidies are intended to make fuel affordable for consumers and to stabilize inflation, but their removal often leads to immediate adjustments in domestic fuel prices, which can ripple through transportation costs, industrial production, and the general price level. In Nigeria, fuel subsidy removal has been a highly debated policy measure, given its implications for household welfare, business costs, inflation, and public revenue. Akinola and Omoniyi (2023) define it as the gradual or sudden withdrawal of government financial support on fuel prices, with the aim of aligning domestic prices with global market rates, emphasizing the dual impact on fiscal savings and inflationary pressures. Eze and Okonkwo (2024) describe fuel subsidy removal as a macroeconomic reform tool designed to reduce government expenditure on fuel subsidies, improve fiscal balances, and encourage market-driven pricing, while recognizing that such policy changes may provoke short-term inflation and social discontent. Oluwaseun and Abiola (2022) focus on the socio-economic dimension, viewing subsidy removal as the policy-driven reallocation of resources from subsidized fuel consumption to alternative government spending priorities, which can affect household consumption, transportation costs, and overall cost of living.

Fuel subsidy removal is not merely a technical adjustment of energy prices but a strategic fiscal and economic intervention. It is often accompanied by measures to cushion households and businesses from sudden price shocks, such as targeted cash transfers, social safety nets, or gradual phasing of subsidy reductions. Econometric studies commonly examine its effects using variables such as inflation rate, consumer price index, transport cost index, fiscal deficit, and household welfare. For Nigeria, the removal of fuel subsidies has significant implications for macroeconomic stability and fiscal sustainability. While reducing subsidies can improve fiscal balance and free resources for infrastructure and social programs, it often triggers immediate increases in fuel prices, which cascade into higher transportation and production costs, thereby affecting inflation and household welfare.

Inflation Dynamics

Inflation dynamics refers to the patterns, causes, and behavior of changes in the general price level of goods and services within an economy over time. It encompasses not only the rate of inflation but also the factors driving it, the persistence of price changes, and the transmission mechanisms through which different sectors of the economy respond. Understanding inflation dynamics is crucial because inflation affects purchasing power, cost of living, investment decisions, and overall economic stability. Akinyemi and Okoro (2023) define it as the evolution of consumer and producer prices influenced by both supply-side and demand-side factors, including energy costs, fiscal policy, monetary conditions, and external shocks, emphasizing its multi-causal nature. Ibe and Chukwuemeka (2024) describe inflation dynamics as the response of the general price level to macroeconomic shocks and policy interventions, highlighting that the magnitude and persistence of inflation depend on structural characteristics of the economy, including market competitiveness and institutional quality. Onyema and Adepoju (2022) focus on the Nigerian context, defining inflation dynamics as the interaction between food and energy price volatility, monetary expansion, and fiscal imbalances, which collectively determine short-run and long-run price behavior.

Inflation dynamics captures both the rate and variability of price changes, examining how prices respond to shocks in supply, demand, and policy instruments. Inflation dynamics in Nigeria is very important due to the economy’s susceptibility to fuel price shocks, food supply disruptions, and fluctuations in petroleum revenue. High inflation or unpredictable price behavior erodes household purchasing power, raises the cost of doing business, and creates macroeconomic uncertainty. Earlier studies have highlighted the nuanced relationships between policy interventions and price movements. Owolabi and Okafor (2023) find that fuel price shocks and subsidy adjustments significantly influence inflation in the short run, while monetary policy and fiscal discipline determine long-run stability. Similarly, Eze and Nnamdi (2022) observe that food price volatility, combined with exchange rate fluctuations, drives persistent inflationary pressures in Nigeria, suggesting that comprehensive policy measures are required to manage inflation effectively. These findings underscore the importance of monitoring inflation dynamics as a tool for designing effective macroeconomic and social policies.

Relationship between Fuel Subsidy Removal and Inflation Dynamics

The relationship between fuel subsidy removal and inflation dynamics has been a central focus of economic policy debates in Nigeria. Fuel subsidies are government interventions designed to keep petroleum product prices below the market level, ensuring affordability for households and reducing cost-push pressures on the economy. The removal of these subsidies, often driven by fiscal pressures or policy reforms, directly affects domestic fuel prices, which in turn influence transportation costs, production costs, and the general price level, creating a ripple effect throughout the economy. Consequently, fuel subsidy removal has significant implications for both short-term and long-term inflationary trends.

Scholars such as Akinola and Omoniyi (2023) argue that fuel subsidy removal constitutes a macro-fiscal adjustment that alters the cost structure of the economy, triggering immediate price increases in energy and related sectors, which contributes to inflationary pressures. Eze and Okonkwo (2024) describe subsidy removal as a policy instrument that reduces government expenditure on subsidies but introduces short-term inflationary shocks, emphasizing that the impact on inflation dynamics depends on the effectiveness of complementary policies such as social safety nets or gradual phasing strategies. Similarly, Oluwaseun and Abiola (2022) highlight that fuel subsidy removal influences both headline and core inflation by affecting production and transportation costs, as well as consumer expectations, thereby altering the persistence and volatility of inflation. The removal of fuel subsidies impacts inflation dynamics through multiple channels. On the cost-push channel, higher fuel prices increase the costs of goods and services, particularly transportation and energy-intensive sectors. On the expectations channel, households and businesses may adjust consumption and pricing behavior in anticipation of sustained higher costs. On the fiscal channel, savings from reduced subsidies can be redirected to infrastructure or social programs, which may have offsetting effects on aggregate demand.

Theoretical Literature

Cost-Push Inflation Theory

The Cost-Push Inflation Theory explains how rising production costs, particularly for key inputs like labor, raw materials, and energy, can lead to increases in the overall price level. The theory posits that when firms face higher costs, they pass these onto consumers in the form of higher prices, resulting in inflation even when aggregate demand is not increasing. This concept became prominent in the 1970s, during global oil shocks, when sudden increases in oil prices led to inflationary pressures in many economies. Proponents of the theory include Samuelson and Solow (1960s–1970s), who highlighted the role of input costs in driving inflation, and Phillips (1958), whose work on the wage-price relationship demonstrated how rising wages can induce inflationary pressures. Later, economists like Tobin (1972) emphasized that energy price shocks can propagate through production costs, affecting both goods and services prices.

Opponents, such as Milton Friedman (1968) and Sargent (1971), argue that cost-push inflation is primarily a monetary phenomenon, and that without accommodating monetary expansion, increases in costs alone cannot sustain prolonged inflation. Critics also contend that the theory may overstate the role of supply-side shocks and underestimate the effect of aggregate demand in determining the price level. The Cost-Push Inflation Theory is particularly relevant for anchoring a study on fuel subsidy removal and inflation dynamics in Nigeria because the removal of subsidies directly raises fuel prices, increasing transportation and production costs across the economy, which then transmits into general price increases. The theory was used to anchor this study because it provides a robust framework for understanding how external shocks to input prices, such as fuel, can drive inflationary pressures and influence the dynamics of price stability in a resource-dependent economy like Nigeria.

Exchange Rate Pass-Through Theory

The Exchange Rate Pass-Through Theory was propounded by Marston in 1977. According to the theory, when the domestic currency depreciates, the cost of imported inputs rises, which can be transmitted into higher production costs and consumer prices. Conversely, an appreciation of the domestic currency can lower import costs, mitigating inflationary pressures. The theory became prominent in the 1970s and 1980s with the rise of open economies and increased trade integration. Proponents include Marston (1977), who analyzed how exchange rate fluctuations influence import and domestic prices, and Rogoff (1996), who highlighted the factors affecting the degree and speed of pass-through in open economies. Later studies by Gregorio and Giovannini (1998) emphasized that the degree of pass-through is influenced by the pricing behavior of firms, currency invoicing, and market competition. Opponents, such as Taylor (2000) and Eichenbaum (1995), argue that exchange rate changes do not fully transmit into domestic prices due to pricing-to-market strategies, contracts in stable currencies, and the presence of menu costs.

Critics also contend that Exchange Rate Pass-Through is often incomplete and varies across sectors, with essential goods such as energy and fuel exhibiting higher pass-through than others. The Exchange Rate Pass-Through Theory is particularly relevant for anchoring a study on fuel subsidy removal and inflation dynamics in Nigeria because fuel prices are sensitive to international oil prices and exchange rate movements. When subsidies are removed, the domestic adjustment to global oil prices can interact with exchange rate depreciation, transmitting additional costs to consumers and businesses, thereby influencing inflation dynamics.

Empirical Literature

Abdullahi et al., (2025) investigated the effects of fuel subsidy removal on inflation rate in Nigeria using monthly data from January 2020 to March 2024. The research employed the Autoregressive Distributed Lag (ARDL) model to analysed relationships between key economic variables, testing two primary hypotheses regarding fuel-related policy interventions on macroeconomic indicators through rigorous econometric testing and cointegration techniques. The investigation provided evidence rejecting both null hypotheses. For fuel price-inflation nexus, long-run ARDL results reveal a statistically significant positive relationship, at 1% significance level (coefficient: 0.002434, p-value: 0.0004), indicating a one-unit fuel price increase associates with 0.002434 unit inflation increase. Short-run dynamics demonstrate complex adjustment mechanisms, including initial negative effects at first lag (coefficient: -0.00022, p-value: 0.0032), suggesting immediate economic adjustments. The results have significant policy implications, suggesting need for gradual subsidy removal approach to manage both inflationary pressures and growth stimulation effectively.

Adeyemi et al., (2024) examined the impact of fuel subsidy removal on Nigeria’s inflation from 2000–2023. The dependent variable was headline inflation (INF). Independent variables included fuel subsidy expenditures (SUBEX), fuel pump price (FPP), exchange rate (EXR), money supply (M2), and food price index (FPI). The study employed ARDL bounds testing with ECM to estimate short-run and long-run effects. Results indicated that SUBEX was positive and significant, suggesting fuel subsidy removal increases inflation. FPP was also positive and significant, EXR depreciation contributed positively to inflation, M2 was positive but weakly significant, while FPI reinforced inflationary pressures in the long run. In conclusion, fuel subsidy removal increases inflationary pressures in Nigeria, particularly through transport and food channels. To address this, the government should implement gradual subsidy removal combined with targeted cash transfers to cushion vulnerable households and stabilize prices.

Afolabi and Eze (2024) examined food inflation (FOINF) in Nigeria (2005–2023). Independent variables included fuel price hike (FPH), fuel subsidy savings (FSSAV), transport cost (TC), exchange rate (EXR), and agricultural output (AGOUT). Using Cointegration and FMOLS, FPH and FSSAV were positive and significant, TC positive, EXR positive and significant, while AGOUT was negative and significant, showing higher agricultural output mitigates inflation pressures. In conclusion, food inflation rises after fuel subsidy removal due to higher transport costs and food prices, but agricultural output mitigates pressures. Policymakers should boost agricultural production and improve distribution networks to reduce inflation from fuel price hikes.

Ali and Balogun (2024) analyzed service-sector inflation (SINF) (2005–2023). Variables: FSR, FPI, EXR, credit to services (CTS). Using ARDL with ECM, FSR, FPI, EXR positive and significant; CTS negative and significant. In conclusion, service-sector inflation rises with fuel subsidy removal, but credit access mitigates pressures. Recommendation: Improve credit availability to services and phase fuel subsidies gradually.

Taiwo (2024) examined the impact of fuel subsidy removal on Nigeria’s inflation from 2000–2023. The dependent variable was headline inflation (INF). Independent variables included fuel subsidy expenditures (SUBEX), fuel pump price (FPP), exchange rate (EXR), money supply (M2), and food price index (FPI). The study employed ARDL bounds testing with ECM to estimate short-run and long-run effects. Results indicated that SUBEX was positive and significant, suggesting that subsidy removal increases inflation. FPP was also positive and significant, EXR depreciation contributed positively to inflation, M2 was positive but weakly significant, while FPI reinforced inflationary pressures in the long run. In conclusion, fuel subsidy removal increases inflationary pressures in Nigeria, particularly through transport and food channels, and it is recommended that the government implement gradual subsidy removal combined with targeted cash transfers to cushion vulnerable households and stabilize prices.

Afolabi and Eze (2024) examined food inflation (FOINF) in Nigeria (2005–2023). Independent variables included fuel price hike (FPH), fuel subsidy savings (FSSAV), transport cost (TC), exchange rate (EXR), and agricultural output (AGOUT). Using Cointegration and FMOLS, FPH and FSSAV were positive and significant, TC positive, EXR positive and significant, while AGOUT was negative and significant, showing higher agricultural output mitigates inflation pressures. In conclusion, food inflation rises after fuel subsidy removal due to higher transport costs and food prices, but agricultural output mitigates pressures. Recommendation: Boost agricultural production and improve distribution networks to reduce inflation from fuel price hikes.

Okon and Uche (2023) analyzed CPI inflation (CPI) in Nigeria over 1990–2022. Explanatory variables included fuel subsidy spending (SUBSP), fuel price adjustment (FPA), money supply growth (M2G), real GDP growth (RGDPG), and credit to private sector (CPS). Using ARDL with Granger causality, SUBSP reduction negatively affected CPI in the short run but became positive in the long run, FPA was positive and significant, M2G was positive, RGDPG negative and significant, and CPS had a stabilizing but insignificant role. In conclusion, short-term effects of subsidy removal may temporarily reduce inflation, but structural adjustments drive longer-term inflation, and it is recommended to enhance economic growth and improve credit flows to offset inflation pressures post-subsidy removal.

Nwankwo and Adebayo (2023) analyzed core inflation (CINF) in Nigeria (1992–2022). Independent variables: fuel subsidy removal dummy (FSRD), FPI, bank lending rate (BLR), broad money (M2), and unemployment rate (UNEMP). Using VAR with impulse response functions, FSRD shocks increased CINF, FPI, BLR, M2 positive and significant, UNEMP negative and significant. In conclusion, subsidy removal shocks raise core inflation, amplified by monetary expansion. Recommendation: Implement tight monetary policy and targeted social programs to limit inflationary spillovers.

Akinbode and Okpara (2023) analyzed CPI inflation (INF) (1998–2021). Variables: fuel price change (FPC), subsidy policy index (SPI), exchange rate (EXR), energy cost pass-through (ECPT), transport sector inflation (TSINF). Using Panel FMOLS, FPC, SPI, EXR, ECPT, and TSINF were positive and significant. In conclusion, fuel price adjustments after subsidy removal drive inflation across sectors. Recommendation: Introduce gradual price reforms and sector-specific support to smooth inflationary effects.

Eze and Okeke (2023) analyzed core inflation (CINF) in Nigeria over 1995–2022. The dependent variable was CINF. Explanatory variables were fuel subsidy status (FSS) (binary), fuel price volatility (FPV), aggregate demand (AD), government spending (GEXP), and wage growth (WAG). Using a Vector Error Correction Model (VECM), the study found that FSS removal significantly increased inflation volatility. FPV and GEXP were positive and significant, AD was positive but less significant, and WAG had a lagged positive effect. In conclusion, subsidy removal triggers persistent inflationary pressures, amplified by fiscal and wage policies, and it is recommended that policymakers coordinate subsidy reforms with fiscal restraint and gradual wage adjustments to prevent inflation spikes.

Akinbode and Okpara (2023) analyzed CPI inflation (INF) (1998–2021). Variables: fuel price change (FPC), subsidy policy index (SPI), exchange rate (EXR), energy cost pass-through (ECPT), transport sector inflation (TSINF). Using Panel FMOLS, FPC, SPI, EXR, ECPT, and TSINF were positive and significant. In conclusion, fuel price adjustments after subsidy removal drive inflation across sectors. Gradual price reforms and sector-specific support are essential to smooth inflationary effects.

Eze and Okeke (2023) analyzed core inflation (CINF) in Nigeria over 1995–2022. The dependent variable was CINF. Explanatory variables were fuel subsidy status (FSS) (binary), fuel price volatility (FPV), aggregate demand (AD), government spending (GEXP), and wage growth (WAG). Using a Vector Error Correction Model (VECM), the study found that FSS removal significantly increased inflation volatility. FPV and GEXP were positive and significant, AD was positive but less significant, and WAG had a lagged positive effect. In conclusion, subsidy removal triggers persistent inflationary pressures, amplified by fiscal and wage policies. Policymakers should coordinate subsidy reforms with fiscal restraint and gradual wage adjustments to prevent inflation spikes.

Okon and Uche (2023) analyzed CPI inflation (CPI) in Nigeria over 1990–2022. Explanatory variables included fuel subsidy spending (SUBSP), fuel price adjustment (FPA), money supply growth (M2G), real GDP growth (RGDPG), and credit to private sector (CPS). Using ARDL with Granger causality, SUBSP reduction negatively affected CPI in the short run but became positive in the long run, FPA was positive and significant, M2G was positive, RGDPG negative and significant, and CPS had a stabilizing but insignificant role. In conclusion, short-term effects of subsidy removal may temporarily reduce inflation, but structural adjustments drive longer-term inflation. The government should enhance economic growth and improve credit flows to offset inflation pressures post-subsidy removal.

Mohammed and Sani (2022) investigated headline inflation (INF) in Nigeria from 2001–2021. Independent variables included fuel subsidy removal index (FSR), exchange rate (EXR), fuel price index (FPI), transport cost (TC), and food inflation (FOINF). Using GARCH-X models to capture volatility spillovers, they found that FSR had a positive and significant effect on inflation volatility. EXR and FPI were positive and significant in both mean and variance equations. TC was strongly positive, reflecting transport cost transmission, and FOINF reinforced inflation, especially in the long run. In conclusion, fuel subsidy removal increases inflation volatility, particularly in transport and food sectors. Monetary policy buffers and temporary transport subsidies should be introduced to reduce immediate inflation shocks.

Okoye and Salisu (2022) examined inflation volatility (INFV) (2000–2020). Variables: fuel subsidy rate (FSR), fuel price gap (FPG), exchange rate volatility (EXRV), money supply growth (M2G), and government control measures (GCM). Using GARCH-M, FSR, FPG, EXRV, M2G positive and significant; GCM negative but weakly significant. In conclusion, subsidy removal contributes to inflation uncertainty. Strengthening government control measures and stabilizing exchange rates can mitigate volatility.

Ibe and Chukwuma (2023) analyzed urban-rural inflation differentials (URBINF, RURINF) (1998–2022). Variables: FSRD, FPP, TCI, EXR, FPI. Using Difference-in-Difference (DiD) panel estimation, FSRD increased urban inflation more than rural; FPP, TCI, FPI positive and significant; EXR had stronger urban impact. In conclusion, subsidy removal disproportionately impacts urban inflation. Recommendation: Tailor urban-targeted subsidies or compensatory cash transfers to protect vulnerable populations.

Gaps and Value Addition

A review of the empirical literature on fuel subsidy removal and inflation in Nigeria shows a broad consensus that subsidy reforms exert upward pressure on prices, but important gaps remain in relation to the present study’s focus, variable selection, and scope. Existing studies such as Adeyemi et al., (2024), Taiwo (2024), and Akinbode and Okpara (2023) consistently find that fuel subsidy removal—captured through subsidy expenditure, fuel price adjustments, or policy indices—has a positive and significant effect on inflation. Similarly, Afolabi and Eze (2024) and Mohammed and Sani (2022) highlight strong transmission channels through transport costs and food prices, while Nwankwo and Adebayo (2023) and Eze and Okeke (2023) show that subsidy shocks amplify core inflation and inflation volatility. Across most studies, exchange rate depreciation also emerges as a key driver of inflationary pressures, reinforcing the vulnerability of Nigeria’s price system to external shocks.

Despite these contributions, the literature exhibits notable conceptual and measurement limitations. A major weakness lies in the fragmented treatment of fuel subsidy variables. Many studies proxy subsidy removal using single indicators such as subsidy expenditure, fuel price changes, or dummy variables, without integrating these measures into a unified framework. Although Adeyemi et al., (2024) jointly include subsidy expenditure and pump price, most other studies treat these variables separately, thereby limiting a comprehensive understanding of how subsidy removal simultaneously operates through fiscal (expenditure) and price (pump price) channels. Furthermore, crude oil price—a critical determinant of domestic fuel pricing and subsidy burden—is largely absent from the majority of studies, despite its direct relevance to subsidy dynamics in Nigeria. Additionally, another important gap relates to the choice of dependent variable. While the present study focuses on inflation dynamics proxied by the consumer price index (CPI), several existing studies concentrate on disaggregated measures such as food inflation, service-sector inflation, or core inflation. Although these provide useful sectoral insights, they do not offer a holistic assessment of overall price stability. This creates a disconnect between sector-specific findings and aggregate inflation outcomes relevant for macroeconomic policy.

Also, the empirical literature is heavily dominated by conventional econometric techniques such as ARDL, VECM, VAR, and FMOLS, with limited attention to structural shifts associated with major subsidy reforms. The 2023 fuel subsidy removal in Nigeria represents a significant policy break, yet most studies do not explicitly account for such regime changes or their evolving impact on inflation dynamics. A further limitation is the issue of data scope. The bulk of existing studies, including Adeyemi et al., (2024), Afolabi and Eze (2024), and Okon and Uche (2023), rely on data ending in 2022 or 2023, thereby excluding the most recent post-subsidy removal developments. This restricts the ability of prior research to capture current inflationary trends and policy responses in Nigeria. In light of these gaps, the present study departs from prior literature by adopting a more integrated and comprehensive specification that combines fuel subsidy expenditure, pump price of fuel, crude oil price, and exchange rate as proxies for fuel subsidy removal in explaining inflation dynamics measured by CPI. By extending the analysis to 2025, the study also incorporates recent economic realities, thereby providing a more current and policy-relevant understanding of the inflationary consequences of fuel subsidy reforms in Nigeria.

METHODOLOGY

This paper basically relied on secondary data which were obtained from Central Bank of Nigeria (CBN), statistical bulletin and World Banks World Development Indicators (WDI) 2025 was the primary source of information for this research paper. Total Energy Investment (TEI), Government Spending on Energy (GSE), Foreign Direct Investment (FDI), and Renewable Energy Consumption (REC), were used to proxy Energy Investment while Manufacturing Gross Domestic Product was used as a proxy for industrialization. The Augmented Dickey Fuller (ADF) method was used in order to do the unit root test on the model that was developed. Taking into consideration the results of the ADF, the research used the Auto-regressive Distributive Lag (ARDL).

Model Specification

The model specification for this study is anchored on the Cost-Push Inflation Theory, which asserts that increases in the cost of production inputs such as energy prices and exchange rate depreciation are transmitted into the general price level, this study specifies a model to examine the determinants of inflation dynamics in Nigeria. This study adopts and extends the empirical model of Abdullahi et al., (2025), who conceptualized inflation as a function of fuel prices, exchange rate, money supply, and a dummy variable for fuel subsidy removal. The model is specified below

INF =f(FP, EXR, MS, FSR) 1

Where

Inflation Rate (INF), Fuel Prices (FP), Exchange Rate (EXR), Money Supply (M2), and a dummy variable for Fuel Subsidy Removal (FSR).

However, to enhance analytical precision and policy relevance, the present study modifies the model by disaggregating the fuel subsidy removal variable into its core components. Specifically, fuel subsidy removal is decomposed into fuel subsidy expenditure (FSE), pump price of fuel (PPF), and crude oil price (COP), while the exchange rate (EXR) is retained to capture external sector dynamics.

The new expanded model is specified below

CPI = f (FSE PPF, COP, EXR) 2

The mathematical model could be symbolically expressed as;

CPI= β₀ + β₁FSE + β₂ PPF + β₃ COP + β₄ EXR 3

Based on these considerations, the econometric form of the model is expressed as:

CPI= β₀ + β₁FSE + β₂ PPF + β₃ COP + β₄ EXR + e 3

Where:

CPI = Consumer Price Index, FSE = Fuel Subsidy Expenditure, PPF= Pump Price of Fuel, COP = Crude Oil Price, EXR = Exchange Rate, f = functional relationship β₀ = Intercept of relationship in the model/constant B₁-B₄ = Coefficients of each independent or explanatory variable e= Stochastic or Error term.

Description of Variables in the Model

Empirical Data Analysis

Table 1: Descriptive Statistics

Source: E-view 13 Output

The descriptive statistics for the variables covers 36 observations used in the study including one dependent variable (CPI) and four independent variables (FSE, PPF, COP, & EXR). The mean values indicate the average level of each variable during the period under consideration. CPI records a mean of 149.69, suggesting a relatively high average price level, although the wide range between its minimum value of 2.40 and maximum value of 699.40 reflects substantial variation in price levels over time. This is further supported by a high standard deviation of 184.50, indicating that CPI deviates considerably from its mean and exhibits significant fluctuations, likely reflecting periods of inflationary pressure and relative stability. Additionally, Fuel Subsidy Expenditure (FSE) has a mean value of 877.63, with a minimum of 0.00 and a maximum of 5,400.00. The large gap between these values, combined with a very high standard deviation of 1,490.63, indicates extreme variability in subsidy spending. This suggests that government expenditure on fuel subsidies has been highly inconsistent, with periods of zero allocation and periods of substantial fiscal commitment. Also, Pump Price of Fuel (PPF) shows a mean value of 123.61, with a minimum of 5.00 and a maximum of 915.00. The standard deviation of 204.99 is relatively large compared to the mean, indicating that fuel prices have experienced significant fluctuations over the study period.

Furthermore, Crude Oil Price (COP) records a mean of 53.36, with values ranging from 12.72 to 111.67, and a standard deviation of 31.89, suggesting moderate variability compared to the other variables. Exchange Rate (EXR) has a mean value of 237.63, with a minimum of 8.04 and a maximum of 1,535.05. The high standard deviation of 348.08 indicates substantial dispersion, reflecting significant fluctuations in the value of the domestic currency over time. The deviation of the variables from their mean further highlights the degree of stability within the series. CPI, FSE, PPF, and EXR all exhibit large standard deviations relative to their respective means, indicating that their observations are widely spread and not closely clustered around the average. This suggests a high level of volatility and structural instability in these variables over time. In particular, FSE and EXR display extreme dispersion, implying that they are highly unpredictable and subject to policy shifts and external shocks. On the other hand, COP shows relatively lower dispersion compared to the other variables, suggesting that crude oil prices, while fluctuating, are comparatively more stable than domestic macroeconomic indicators such as CPI and exchange rate.

The skewness statistics reveal that all the variables are positively skewed. CPI (1.78), FSE (2.09), PPF (2.78), COP (0.37), and EXR (2.98) all exhibit right-skewed distributions, indicating that the data are characterized by longer right tails and the presence of extreme high values. This implies that unusually large observations occur more frequently than unusually small ones, particularly for PPF and EXR, which show strong positive skewness. The kurtosis values provide further insight into the shape of the distributions. CPI (5.45), FSE (3.10), PPF (9.87), and EXR (11.45) are leptokurtic, indicating distributions that are more peaked than the normal distribution and characterized by heavy tails and a higher likelihood of extreme values. PPF and EXR, in particular, show very high kurtosis values, suggesting the presence of significant outliers. In contrast, COP (2.86) is slightly platykurtic, indicating a relatively flatter distribution with fewer extreme observations.

The Jarque-Bera statistics and their corresponding probability values provide formal evidence on the normality of the variables. CPI (probability = 0.000001), FSE (0.000000), PPF (0.000000), and EXR (0.000000) all have probability values less than 0.05, indicating that their distributions deviate significantly from normality. Only COP, with a probability value of 0.247843, satisfies the normality condition, suggesting that it is normally distributed. In summary, the results indicate that most of the variables do not follow a normal distribution, with the exception of crude oil price. The presence of non-normality is consistent with the observed high skewness and kurtosis values, which indicate asymmetry and heavy tails in the distributions. However, this does not invalidate further econometric analysis, as unit root tests such as the Augmented Dickey-Fuller and Phillips-Perron tests are robust to non-normality, especially with a sample size of 36 observations. Therefore, despite the lack of normality in most of the variables, the data are suitable for proceeding to unit root testing to determine their stationarity properties.

Unit Root Test

A unit root test known as the Augmented Dickey Fuller (ADF) test was used in the research project to determine the order of integration of the variables that were being investigated. This was done in order to pick the proper approach and prevent false regression.

Table 2: Unit Root Test Using Augmented Dickey Fuller (ADF)

Source: Extracts from E-view 13. * Level of significance at 5%

We examined all of the research variables using Augmented Dickey Fuller (ADF) tests to see whether they were stationary or non-stationary series, following the guidelines provided by table 2. At the initial difference I(1), the stationarity test indicated that CPI, LFSE LPPF, and LCOP, stationary, whereas LEXR is stationary at the level I(0). The variables show either mixed-order integration or stationarity of level and initial differences when we analyse their stationarity. The Autoregressive Distributive Lag (ARDL) technique was used to analyse the data. Both the first difference (I(1)) and the stationary at level I(0) may be handled by this method. The ARDL test is the most appropriate analytical technique to utilise since it looks at the relationship between the independent and dependent variables in terms of both short-term and long-term trends.

Co-Integration Test

Table 3: ARDL Bound Test

Source: Authors computation 2026

From table 3 the bound test result indicates that there exist long run relationships amongst the variables as the F-statistic value of 17.770846 exceeds both the lower and upper bound critical values. Thus, we reject the null hypotheses of no long run relationship and accept its alternative. This means that there is a long-run relationship between Fuel Subsidy Removal and inflation Dynamics in Nigeria.

Short and Long-Run Estimation Results for the Model

The results of the short and long-run dynamics association of the model are presented in table 4 below.

Table 4: ARDL Short and Long-run Result for the Model

Source: Authors computation using E-view 13, 2026

The coefficient estimate for the error correction term, ECM (-1) has a negative value and is significant at the 0.05 level. It suggests that the model will reach long-run equilibrium at a rate of 0.25% every year. This means that a yearly adjustment speed of 0.25% may fix the mistake from the previous year. The independent variables (FSE, PPF, COP & EXR) explain 88% of the total variance in the dependent variable (CPI), according to the adjusted R-Square (R2) value. As a whole, the model is noteworthy since the F-statistic is significant at the 5% level of significance. Without serial correlation, the model would not work, according to the Durbin-Watson statistics of 1.893404 which is close to 2.

Table 3 displays the model's short-and long run outcome. The coefficient of fuel subsidy expenditure (FSE) and pump price of fuel (PPF) had a positive and significant impact on consumer price index (CPI) while the coefficient of crude oil price (COP) exhibited a negative and insignificant relationship with consumer price index (CPI). However, the value of exchange rate (EXR) reported a positive and significant relationship with consumer price index (CPI) in the short-run. Equally, table 3, shows that the outcome of the long-run result that the coefficient of pump price of fuel (PPF) had a positive and significant relation with consumer price index (CPI), while crude oil price (COP) exhibited a negative but significant relationship with consumer price index (CPI). However, both fuel subsidy expenditure (FSE) and exchange rate (EXR) are positive but insignificantly related with consumer price index (CPI) in the long-run.

Diagnostic Test

Table 5: Ramsey Reset Test, Serial Correlation LM Test and Homoscedasticity Test Results

Source: Authors computation 2026

From Table 4, the results of the diagnostic test shows that the linearity test using Ramsey Reset test indicates that the f-statistic (5.612690) with computed p-value of 0.0727 which is greater than 5 percent (0.05) critical value, hence the study reject the null hypothesis and conclude that the model is correctly specified. The result of the Serial or Autocorrelation Test using Breusch-Godfrey Serial Correlation LM Test shows that the f-statistic is 2.149547, with a Chi-Square probability value is 0.1561. This indicates that the probability value of about 16 percent (0.1561) is greater than 5 percent (0.05) critical value; hence the study confirms no serial correlation in the model. The result of the heteroscedasticity test using Breusch-Pegan-Godfrey test shows that the f-statistic is 8.843799 with a Chi-Square probability value of 0.6348 The result suggests that there is no evidence of heteroskedasticity in the model since the probability Chi-square value is more than 5 percent (P >0.05). So, residuals do have constant variance which is desirable in regression meaning that residuals are Homoscedastic.

Figure 1: Normality Test

Figure 1, shows summary of the normality test with Jarque-Bara value of 1.241263 and a corresponding probability value of 0.537605 more than 0.05 level of significance, indicating that the residuals are normally distributed

Figure 2: Stability Test

Figure 2 shows summary of the stability test, the result showed that the model is stable. This is evident to the fact that the blue line is in-between the two red (-5 & +5) or less than 0.05 level of significance.

DISCUSSION OF FINDINGS

Fuel Subsidy Expenditure and Consumer Price Index in Nigeria

The inference drawn from the long-run using the Auto-Regressive Distributive Lag (ARDL) result revealed that Fuel Subsidy Expenditure (FSE) had a positive (+0.001989) relationship with Consumer Price Index (CPI). The positive relationship between Fuel Subsidy Expenditure (FSE) and Consumer Price Index (CPI). do not conform to economic theory. It was expected that higher subsidy spending lowers fuel prices, thereby reducing transportation and production costs and moderating inflation. The p-value (0.9344) of the result indicates that Fuel Subsidy Expenditure (FSE) is statistically insignificant to influence Consumer Price Index (CPI) in Nigeria. The study therefore accepts the null hypothesis that there is no significant relationship between Fuel Subsidy Expenditure (FSE) and Consumer Price Index (CPI). This implies that there is no statistically significant relationship between Subsidy Expenditure (FSE) and Consumer Price Index (CPI). This result aggrees with earlier study by Adeyemi et al., (2024) that fuel subsidy removal increases inflation.

Pump Price of Fuel and Consumer Price Index in Nigeria

The suggestion drawn from the long-run using the Auto-Regressive Distributive Lag (ARDL) result revealed that Pump Price of Fuel (PPF) had a positive (+0.783300) relationship with Consumer Price Index (CPI). The positive relationship between Pump Price of Fuel (PPF) and Consumer Price Index (CPI) conform to economic theory. It was expected that increase in fuel prices raises transportation and production costs, which are passed on to consumers in the form of higher prices The p-value (0.0385) of the result indicates that Pump Price of Fuel (PPF) is statistically significant to influence Consumer Price Index (CPI) in Nigeria. The study therefore reject the null hypothesis that there is no significant relationship between Pump Price of Fuel (PPF) and Consumer Price Index (CPI). This implies that there is a statistically significant relationship between Pump Price of Fuel (PPF) and Consumer Price Index (CPI). This result agrees with previous study by Adeyemi et al., (2024) that fuel pump price had a positive relationship with inflation.

Crude Oil Price and Consumer Price Index in Nigeria

The suggestion drawn from the long-run using the Auto-Regressive Distributive Lag (ARDL) result revealed that Crude Oil Price (COP) had a negative (-0.252889) relationship with Consumer Price Index (CPI). The negative relationship between Crude Oil Price (COP) and Consumer Price Index (CPI) do not conform to economic theory. It was expected that higher oil prices increase energy costs and contribute to overall inflationary pressures. The p-value (0.0067) of the result indicates that Crude Oil Price (COP) is statistically significant to influence Consumer Price Index (CPI) in Nigeria. The study therefore reject the null hypothesis that there is no significant relationship between Crude Oil Price (COP) and Consumer Price Index (CPI). This implies that there is a statistically significant relationship between Crude Oil Price (COP) and Consumer Price Index (CPI).

Exchange Rate and Consumer Price Index in Nigeria

The suggestion drawn from the long-run using the Auto-Regressive Distributive Lag (ARDL) result revealed that Exchange Rate (EXR) had a positive (+0.110435) relationship with Consumer Price Index (CPI). The positive relationship between Exchange Rate (EXR) and Consumer Price Index (CPI) conform to economic theory. It was expected that depreciation of the domestic currency makes imports more expensive, leading to higher prices and increased inflation. The p-value (0.5225) of the result indicates that Exchange Rate (EXR) is statistically insignificant to influence Consumer Price Index (CPI) in Nigeria. The study therefore accept the null hypothesis that there is no significant relationship between Exchange Rate (EXR) and Consumer Price Index (CPI). This implies that there is a statistically significant relationship between Exchange Rate (EXR) and Consumer Price Index (CPI). This result agrees with earlier study by Adeyemi et al., (2024) that exchange rate depreciation contributed positively to inflation.

CONCLUSION AND RECOMMENDATION

Conclusion

The study on the impact of fuel subsidy removal on inflation dynamics suggest that crude oil price had a negative but significant relationship with consumer price index while pump price of fuel exhibited a positive but significant relationship with consumer price index. However, further findings showed that fuel subsidy expenditure had a positive but insignificant relationship with consumer price index while exchange rate revealed a positive but insignificant relationship with consumer price index in the long-run. Thus, it was concluded that fuel subsidy removal had a significant impact on inflation dynamics in Nigeria.

Recommendation

1. The National Assembly of Nigeria should strengthen oversight on subsidy allocations and ensure that such expenditures are better targeted. This includes periodic evaluation of subsidy effectiveness to ensure that public funds translate into tangible price stability benefits rather than fiscal leakages.
2. Again, the Central Bank of Nigeria in collaboration with the National Bureau of Statistics should closely monitor fuel price movements and integrate them into inflation-targeting frameworks. Timely policy responses, such as tightening or easing monetary policy, will help mitigate inflationary pressures arising from fuel price increases.
3. More, so the Federal Competition and Consumer Protection Commission should intensify market surveillance to prevent excessive price pass-through and exploitative pricing by firms. Strengthening consumer protection mechanisms will help cushion households from inflationary shocks driven by rising global oil prices.
4. Finally, the Nigerian Economic Summit Group alongside the Debt Management Office should advocate and implement policies that enhance exchange rate stability through improved external reserves management and reduced reliance on foreign debt. This will help prevent future exchange rate pressures from translating into inflation.

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