The Relationship Between Inflation and Stock Market Returns: An Empirical Study

Abstract

This research examines how inflation impacts stock market returns, analyzing both predictable and unpredicted inflation impacts on inflation listed firms in various sectors. Firm-level data was used and a quantitative research design was adopted with a 150 firms sample from listed sectors on the national stock exchange (finance, energy, tech, consumer goods and industries). Diverse characteristics were captured by including firms of different sizes and years listed, and by using stratified random sampling, representative coverage was obtained for each sector. Firm analysis provided the basis of correlational, descriptive, regression, and ANOVA for stock returns and inflation relation. There was a statistically significant negative correlation meaning higher inflation results in lower stock market returns. Regression analysis indicated the impact of unexpected inflation is more negative on stock returns relative to expected inflation. This confirms markets react more intensely to inflation surprises. ANOVA results showed some difference in the impact of inflation across … what sectors. This suggests some sectors are more sensitive or responsive than others. This has value for risk management, portfolio diversification, and policy design. This is the first paper to conclusively show the importance of monitoring macroeconomic variables for policy and investment decisions. The stock market is inefficient. More work needs to be done to determine what other variables, particularly from the macroeconomic dataset.