CHAPTER ONE
1.1 Background of the Study
Inflation surely is not a new phenomenon in the Nigerian Economy and across the globe. According to IMF (1974), inflation is “the most complex and serious set of economic problems to confront national government and the international community since the end of World War II, consist of virulent and widespread inflation, a deceleration of economic growth and massive disequilibrium of international payments”. In Nigeria, inflation has gradually established a firm grip on the economy of the nation since her Independence. However, despite the slightest increase of 1961, 1962 and 1966, the first nine or ten years after independence can be regarded as a period of relative stability in prices when compared with the prices of the 1970S and 1980S as only a single digit inflation was recorded in the 1960S. Nigeria has consistently had double digit inflation for the past decade. Officially, it started experiencing a two- digit inflation rate from the third quarter of 2008 at the rate of 11.5% (IMF 2011 World Economic Outlook). With falling commodity prices, inflationary pressure should subside to some extent as well.
Aliyu and Englama (2009) indicated that Inflation targeting has an enormous potential as an effective instrument of managing inflation, nations that have adopted it never turn back. Inflation targeting is a monetary policy regime, which is characterized by public announcement of official target ranges or quantitative targets for price level increases and by explicit acknowledgement that low inflation is the most crucial long-run objective of the monetary authorities (Odior, 2011). Under inflation targeting, Central Banks commit to a target level of inflation, usually over one-year horizon (Saidu, 2011). The CBN (2011) indicated that Central Bank bases its policy changes on a forecast of inflation and not the current rate. This means that the central bank forecasts the future path of inflation which is compared with a specified target. The adoption of inflation targeting in addressing the problem of inflation through the Central Bank has grown in acceptance ever since it was adopted by New Zealand in 1989, as quite a number of industrial countries has follow suit in the early 1990s, in addition to a growing number of emerging market and developing countries. Various evaluations have attested to the success of inflation targeting as a potent framework for monetary policy in both developing and developed economies (Bernanke, Laubach, Mishkin and Posen, 1999). This has led to its acceptance and adoption by several countries in the world. In 2006, 24 countries are classified as inflation targeters, including 8 industrial countries and 16 emerging market and developing countries (Odior, 2011). The popularity of inflation targeting is because of its ability to set clear standard,s to evaluate whether or not central banks achieve their inflationary goals, keeps them accountable and guarantees their independence (Petursson, 2005; Kiruhara, 2005).
