Inflation dynamics and retail energy prices in Nigerian states

This study investigates the relationship between inflation dynamics and retail energy prices across Nigerian states. The paper utilizes LSDV and SYS-GMM techniques for the estimation of the static and dynamic panel models. The research disaggregates energy prices into PMS, AGO, HHK and Gas, with CPI as the dependent variable. State Revenue per capita income, representing demand-pull factor of inflation, is used to capture excess liquidity's impact on inflation. Key findings reveal that PMS, AGO, and HHK have significant and distinct effects on inflation, with PMS and AGO driving the largest increases in CPI. Gas price also contribute to inflation, but its impact is moderated by a substitution effect, where consumers shift to gas in response to rising prices of HHK and other household cooking energy sources. This substitution effect reduces the inflationary pressure from gas, making its overall contribution to CPI less pronounced. Importantly, State Revenue per capita income is positively correlated with inflation, highlighting the role of federal transfers in exacerbating demand-pull inflation. For policymakers, these findings emphasize the importance of targeted interventions to stabilize energy prices, particularly PMS, AGO and federal transfers in shaping local economic dynamics and inflationary pressures. This targeted interventions to stabilize energy prices are vital for mitigating inflationary pressures in Nigerian states, as they account for regional economic differences, ensuring more effective and equitable economic stability across the country. Key Words:Inflation Dynamics; Retail Energy Prices; State Revenue per capita income; Substitution Effect