Modeling rates of inflation in Nigeria: an application of ARMA, ARIMA and GARCH models

Based on time series data on inflation rates in Nigeria from 1960 to 2016, we model and forecast inflation using ARMA, ARIMA and GARCH models. Our diagnostic tests such as the ADF tests indicate that NINF time series data is essentially I (1), although it is generally I (0) at 10% level of significance. Based on the minimum Theil’s U forecast evaluation statistic, the study presents the ARMA (1, 0, 2) model, the ARIMA (1, 1, 1) model and the AR (3) – GARCH (1, 1) model; of which the ARMA (1, 0, 2) model is clearly the best optimal model. Our diagnostic tests also indicate that the presented models are stable and hence reliable. The results of the study reveal that inflation in Nigeria is likely to rise to about 17% per annum by end of 2021 and is likely to exceed that level by 2027. In order to address the problem of inflation in Nigeria, three main policy prescriptions have been suggested and are envisioned to assist policy makers in stabilizing the Nigerian economy.