How Does Inflation Rate Affect Stock Market

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.3.3 Inflation Rate The inflation rate used as an indicator in measuring the stability of economic condition for a particular country (Rashid et al., 2011). In financial theory, inflation rate reflected by consumer price index (CPI) represents all the price of goods and services will go up and it need to take more money to buy the same items. Moreover, high inflation is likely cause a great impact on economic activities of a particular country because it reduces the purchasing power of domestic consumers and it would lead to currency value decline. The previous researchers believe that the inflation rate will influence the stock market return. There are many empirical studies establish that the inflation rate has an impact on stock market…show more content…
Khil & Lee (2000) investigate on ten pacific countries and the US stated that all the countries except Malaysia the negative relationship between inflation and stock market return. Adam & Tweneboah (2008) used the consumer price index, employing co-integration test and vector error correlation model (VECM) as analytical techniques, the study found that the lagged values of inflation have negative significant effects on the stock market. Moreover, Fama & Schwert (1997) found a negative relationship between inflation rate and stock market return. They used data from Bureau of Labor Statistic Consumer Price Index (CPI) to estimate the inflation rate and used an equally weighted portfolio of New York Stock Exchange as stock market return. They concluded that when the inflation is high, then the stock market return will…show more content…
The oil price increase may affect the economy activity, especially in the increase in the cost of production of goods and services, which in turn may influence the inflation rate, consumer confidence, and financial markets. Inflation happen will be transposed to consumer which eventually reduce their purchasing power and investment. During oil crisis in 1973-1974, a decline of stock prices is interpreted by the increase in oil prices and it indicate that oil price change may lead to stock market returns volatility (Bina & Vo, 2007). Crude oil price is the primary fuel of industrial activities and plays a significant role in shaping the economic and political development of the countries, not only by directly influencing the aggregate indicator but also by affecting the companies’ operational costs and its revenue. When the stock market is efficient, positive crude oil price shocks would adversely impact the companies’ cash flows and market values, lead to immediate decline in the overall stock market returns (Hamilton, 1983). Accordingly, oil price changes may influence stock

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