Evaluating the Inflationary Consequences of Fuel Subsidy Removal: An Econometric Approach to Price Transmission in Nigeria

The removal of fuel subsidies in Nigeria has generated widespread debate due to its significant implications for inflation and general price levels. This study evaluates the inflationary consequences of fuel subsidy removal using an econometric approach to analyze price transmission mechanisms within the Nigerian economy. By employing a vector autoregression (VAR) model and impulse response functions, the research investigates how changes in fuel prices, following subsidy elimination, influence inflation dynamics across key sectors such as transportation, food, and manufacturing. Quarterly time series data from 2000 to 2024 were utilized to capture both short-run shocks and long-run adjustments in consumer price indices relative to fuel price changes. The findings reveal a strong and immediate transmission of fuel price increases to general inflation, with significant pass-through effects particularly evident in the transport and food sectors. The study also identifies lagged responses in other components of the consumer basket, suggesting a prolonged inflationary impact over time. Moreover, the results indicate that the degree of price pass-through is amplified in the absence of adequate compensatory fiscal measures and social safety nets. This research contributes to the ongoing policy discourse by highlighting the structural channels through which fuel subsidy removal affects macroeconomic stability. It emphasizes the need for a phased and well-targeted reform approach, accompanied by investment in public transportation, energy alternatives, and social protection programs to mitigate adverse welfare effects. The study concludes that while subsidy reform is necessary for fiscal sustainability, its implementation must be carefully managed to prevent excessive inflationary pressures and socioeconomic disruptions. The econometric evidence presented offers a data-driven basis for policymakers to design responsive and inclusive strategies in navigating energy pricing reforms in Nigeria.