Effect of Wage Increase and Exchange Rate Fluctuations on Inflation in Nigeria

This study examines the effect of wage increases and exchange rate fluctuations on inflation in Nigeria, focusing on the interplay between these variables and their broader economic implications. The study's primary objectives include investigating the simultaneous occurrence of wage increases and exchange rate fluctuations and their collective impact on inflation, analysing how external economic factors, such as global commodity prices, interact with domestic wage dynamics to influence inflation, and evaluating existing economic policies related to wages, exchange rates, and inflation in Nigeria. The analysis employs an autoregressive distributed lag (ARDL) model to assess long-run dynamics, revealing significant findings. The model explains approximately 98.8% of the variation in the inflation rate, with the F-statistic indicating a substantial relationship between the inflation rate and the explanatory variables. The results demonstrate that wage increases have a negative and insignificant impact on inflation, contrary to initial expectations, suggesting that government wage hikes may reduce inflation in the long run. Similarly, exchange rate fluctuations exhibit a negative and significant effect on inflation, aligning with expectations that a weakening currency suppresses investment, thereby lowering inflation. Additionally, GDP growth negatively affects inflation, while interest rate increases show a positive but insignificant effect. These findings highlight the complex and sometimes counterintuitive relationships between wages, exchange rates, and inflation in Nigeria, providing insights into the effectiveness of current economic policies. The study's conclusions underscore the need for a nuanced approach to managing inflation, considering both domestic wage policies and external economic factors.