The effect of inflation on stock prices

Did you know that besides the financial condition of the company? macroeconomic condition of a country It may affect the share price as well. The macroeconomic indicator that can affect stock prices is inflation.

Let’s look at an example of a case that has just happened in the United States. In June 2022, the consumer price index (One of the main factors of inflation) in Uncle Sam’s country surged to 8.6 percent, pushing stock prices into the S&P 500 steadily falling and entering a bear market throughout the month.

What is inflation and how will this economic indicator affect stock prices?

Definition of Inflation

inflation It is a phenomenon where product prices go up at the same time over a period of time.

In fact, inflation is a natural phenomenon that occurs in the economies of different countries. around the world in this modern era but must be properly controlled

Inflation is a natural phenomenon. because with the increasing number of people The demand for clothing, food, housing and lifestyles must be more responsive. As a result, the price of clothing, food, housing and lifestyle has increased.

However, on the other hand, inflation can affect people’s purchasing power by reducing the exchange rate of currencies relative to commodities. You used to get 2 fried food for Rp. 1000, now you only get 1 fried seed.

Indonesia currently uses two types of inflation: target inflation and real inflation. The target inflation rate is the inflation rate desired by the Bank of Indonesia as a financial authority. while real inflation is actual inflation.

cause of inflation

There are three causes of inflation:

1. Demand-pull inflation

Demand Pull Inflation is the inflation rate caused by an increase in demanded supply. while the supply volume is assumed to be constant. A simple example is land and house prices. Land and house prices continue to rise every year as the number of people who want to buy a home, either for residential or investment purposes, is rising. while the number of land offerings is relatively stable.

2. Inflation pulls costs

Cost-pull inflation is inflation caused by rising production costs. A simple example is the increase in the price of fried food due to higher cooking oil prices. If in the past when the price of cooking oil was around Rs 20,000 per liter You can get 2 fries for 1000 rupiah now when cooking oil is 25000 rupiah per liter. You will only get 1 fries for 1000 rupiah. This is due to the increased cost of producing fries for fry sellers to raise the price of their products.

3. Currency Circulation

Another factor that can cause inflation is the flow of currency. The easier it is for people to buy things. So the price of some things goes up (demand-pull inflation). The volume of currency circulating is also regulated by Indonesian banks.

The effect of inflation on stock prices

The topic of inflation’s impact on stock prices is one of the most studied by academics and researchers, according to Tandelilin in his book Portfolio and Investment (Theory and Application) (2010). negative to the share price This will increase the production cost and reduce the company’s revenue.

This is consistent with the drop in the S&P 500 stock index example above, which dropped from 4,700 in early 2022 to 3,600 on June 16, 2022. At that time, the US Consumer Price Index (CPI) was added. continued to increase from 7% to 8,6%

However, in summary, inflation theory has a negative effect on stock prices. which does not work in Indonesia because according to BPS data Inflation in 90 cities In the first half, it rose from 0.56 to 3.19. However, these price increases were not followed by a decline in the JCI during the same period. In the first quarter of 2022, JCI appreciated from 6,600 to 7,200 before somewhat sideways at 6,500-6,700 at the time of writing.

This ambiguity indicates to determine the impact of the stock market. Investors and traders should read a lot of research on this topic. This is because often the effect of inflation on the stock market in two different countries will also have different effects.

It is also possible that there are differences. Inflation effect to stock prices in different sectors in the same year, not to mention theoretically Analysis of this topic could not be done with just one year of data.

Several research findings on the impact of inflation on stock prices

1. Rapach DE (2001): Using stock market data from 16 developed countries in the world, Rapach concluded that there was no significant correlation between inflation and stock prices.
2. Graham (2006): Using US stock market data from 1953-1990, Graham concludes that the relationship between inflation and stock prices is unstable. Sometimes it’s positive and sometimes it’s negative.
3. Lapodis (2006): In contrast to Graham, Lapodis used US stock market data from 1970-1980 to conclude that there was a negative correlation between stock prices and inflation.
4. Tambunan and Aminda (2021): Tambunan and Aminda used monthly JCI data from May 2015 to April 2020, indicating that for the Indonesian stock market there was no significant negative impact between inflation and stock prices.
5. Dwi Wulandari (2015): Using monthly inflation data and the JCI from 2001-2013, Dwi concluded that there was no significant correlation between inflation and stock prices in the Indonesian stock market.
6. Sukeng Rahajo (2010): Raharjo concludes that inflation has a positive effect on the stock prices of 19 companies on the Indonesian Stock Exchange.

How to deal with inflation as a stock investor

With these different research findings How do you deal with inflation as a stock investor?

1. Calm down

From the above discussion It can be seen that although theoretically The effect of inflation on stocks will be negative. (If the inflation rate increases In fact, this often varies, so investors in times like these should stay calm and make emotional decisions.

2. Continue reading

Reading here may mean reading stock price charts. reading economic news or reading expert analysis The goal is to give traders and investors more confidence in their investment decisions.

3. Keep an eye on value stocks

Value stock is a type of stock that is undervalued. true value In general, companies in the valuation category are stable companies with good cash flow. Such stocks are probably safer. growth Stocks when inflation was as high as they are today.

Several studies also indicate that inflation may not directly affect stock prices. But at the same time, there are other macroeconomic indicators such as reference interest rate, GDP and so on. So instead of using inflation alone. Investors and traders should also pay attention to other economic indicators.