Application of Factor Analysis in the Modelling of Inflation Rate in Nigeria

Abstract

Inflation is a sustained increase in the general price level of goods and services in an economy over some time. The measure of inflation is the inflation rate, the annualized percentage change in the general price index usually the consumer price index over time. This study examines the application of factor analysis on the Nigeria inflation rate, The specific objectives of the study are: to describe the covariance relationship among the headline, core and non-core inflation rates in Nigeria. The headline inflation is the “all items” inflation, the core inflation is the “all items less farm produce” and “all items less farm produce and energy” inflation while the non-core inflation is the “food” inflation. To analyze the data generated for the study, the principal component and maximum likelihood method of factor analysis were employed. The findings of the study show that for the different kinds of inflation in Nigeria, there exists some covariance relationship amongst the months of the years and three underlying factors were discovered to be responsible for these relationships which are known as the early month factor, the middle month factor and the late month factor