Inflation dynamics and household consumption: an empirical analysis across economic periods (2000 – 2024).

Abstract

This study examines the effect of inflation on household consumption in Uganda over the period 2000 to 2024 using annual time-series data sourced from the World Bank World Development Indicators. Existing studies in Uganda treat this relationship as structurally static and fail to apply time series methods capable of distinguishing short run from long run dynamic gaps this study examines. The study pursues two specific objectives: To examine how the relationship between inflation and household consumption varies across different economic periods and to determine the short-run and long-run effects of inflation on household consumption. To address the first objective, the study estimates an Ordinary Least Squares regression of household consumption on inflation, real GDP per capita and an interaction term between inflation and an economic crisis dummy which tests whether the relationship is dependent on periods. To address the second objective, Augmented Dickey Fuller unit root tests are first conducted to establish each variable’s order of integration and the Autoregressive Distributed Lag (ARDL) bound testing approach is applied followed by an Error Correction Model (ECM) that decomposes the relationship into short run dynamics and a long run equilibrium correcting term. Diagnostic tests for heteroscedasticity, multicollinearity and serial correlation are conducted throughout to validate the OLS estimates. The results indicate no statistically significant relationship between household consumption and inflation in Uganda. While the estimated coefficients are negative, neither coefficient is statistically significant at conventional levels. Consequently, both null hypotheses are not rejected. Real GDP per capita is confirmed as the dominant positive driver of household consumption, with a coefficient of 0.0513 (p < 0.001), confirming income as the primary determinant of consumption. The ARDL bounds test indicates no statistically significant long run cointegration at conventional levels, though the Error Correction Term is negative (0.1454) and the long-run model is statistically significant overall (R² = 0.9550, F = 106.10, p < 0.001). The speed of adjustment is approximately 14.5% per year. The study recommends that the Bank of Uganda sustain inflation below 5% through monetary policy as a precautionary measure and that the government implement fiscal measures targeting household income support during crisis periods. These findings have important implications for macroeconomic policy design and household welfare protection in Uganda.