Premium Motor Spirit Prices and Consumer Price Indices in Nigeria: Evidence from a Markov-Switching Model

The Nigerian economy has historically been highly sensitive to fluctuations in premium motor spirit (PMS) prices due to the central role of petroleum products in transportation, production, and household consumption. Over the years, recurrent fuel subsidy reforms, exchange rate pressures, and global crude oil price shocks have contributed to persistent increases in inflation and rising consumer prices across major sectors of the economy. In recent years, particularly following the removal of fuel subsidies in 2023, Nigeria experienced sharp increases in PMS prices, which significantly affected the cost of food, transportation, healthcare, and education. These developments have intensified concerns among policymakers and researchers regarding the transmission of fuel price volatility into consumer price indices, thereby necessitating empirical investigation into the dynamic relationship between PMS prices and inflationary trends in Nigeria. This study examined the association of premium motor spirit prices on consumer price indices in Nigeria. The study covered a period from 2001Q1 to 2023Q4 covering 23 years and 92 quarterly observations. The study focused on four indicators of consumer price indices; food price index, transportation price index, health price index and education price index while the control variables adopted include financial deepening, government spending and gross domestic product. The study utilised quarterly data which were sourced from the Central Bank of Nigeria (CBN) statistical bulletin and the National Bureau of Statistics (NBS) report. The study employed the Two-State Markov-Switching Dynamic Model (MSDM) to capture regime-dependent effects and nonlinear transitions between high- and low-volatility periods. The results indicated that regime 1 was defined as the “high premium motor spirit price volatility” state and regime 2 as the “low premium motor spirit price volatility” state for all the models. Other key findings showed that premium motor spirit prices exert consistently positive and statistically significant effect on all four consumer price indices. Based on the findings, the study concluded that premium motor spirit prices have a significant effect on consumer price indices in Nigeria. The study recommended, among other measures that the government should establish a strategic fuel price stabilisation mechanism through the creation of petroleum reserve buffers and targeted market intervention policies. This would help reduce sudden fuel price spikes that transmit rapidly into food, transportation, health, and education prices. The study contributes to the literature by providing an empirical assessment of the effect of premium motor spirit prices on multiple dimensions of consumer price indices in Nigeria and contributed methodologically through the adoption of the Two-State Markov-Switching Dynamic Model (MSDM), which captures regime-dependent effects and nonlinear transitions between high- and low-volatility periods in premium motor spirit prices. This approach improves on conventional linear models by recognising that the Nigerian economy experiences structural shifts, policy changes, and market shocks that influence inflation differently across time.