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IMPACT OF INFLATION ON STOCK MARKET PERFORMANCE IN THE

PHILIPPINES

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 ISSN- 2394-5125 VOL 7, ISSUE 13, 2020

IMPACT OF INFLATION ON STOCK MARKET

PERFORMANCE IN THE PHILIPPINES
Sherwin T. Natividad
College of Business and Management Isabela State University – Cauayan Campus

Received: 14 March 2020 Revised and Accepted: 8 July 2020

ABSTRACT: This study analyzed the impact of inflation on stock market performance in the Philippines using
a time series data for five years from 2014-2018 obtained from the Bangko Sentral ng Pilipinas. The Spearman
Rank Order Correlation was used to determine the relationship between inflation and the stock market. The
result showed that negative and positive relationship exists in some categories in terms of value and volume
traded. Investors may invest in the stock market to hedge the risk of rising inflation because no significant
relationship was found in the majority of the categories in the stock market.

KEY WORDS: inflation; the impact of inflation; stock market; stock market performance

I. INTRODUCTION
Inflation is one of the factors that contribute to the poor performance of the economy. High inflation weakens
the purchasing power of the people due to the high prices of commodities. In 2018, the Philippines’ inflation
reached the highest rate of 6.7% since January of 2013. In fact, by September 2018, data indicated that the
country’s inflation rate is the highest in all ASEAN countries. Inflation has a high impact on people, especially
the poor. As Reyes (1996) cited by the Socioeconomic Research Portal for the Philippines or SERP-P (2018)
stated, the poorest Filipinos spend about 60 percent of their earnings on food, wherein prices go up faster
compared to other commodities except for oil. These findings were proven by the research group IBON (2018)
when it indicated how the rising prices of vegetables, corn, and fish in 2018 affected low income families
adversely, pushing them into hunger and increased poverty.

Inflation is unpredictable. This concept leads to a more negative effect since there is a redistribution of wealth
from borrowers to lenders or vice versa. According to Geetha, Mohidin, Chandran, and Chong (2011), this
creates a problem for the analysis of stock market returns in the long run because of the volatility of stock
prices.

Since this is the case, the effect of inflation on the stock market has become a phenomenon of interest for many
studies. This issue is especially true as almost all economies are experiencing high rates of inflation at present.
Nonetheless, there is still a lot of inconsistency in this area, as studies reveal opposing results. As Geetha,
Mohidin, Chandran, and Chong (2011) stressed that the relationship between the two variables is still unclear
since the different periods of the research conducted may have different findings as well.

According to Dagar (2014), the stock market is one of the sectors that contribute immensely to the economy.
Kelly (2010) specifies that the foremost connection between the stock market and the economy lies in the
aggregate that monetary and credit increase pushes both the GDP and stock market. (Rabbani & Jabbar, 2015)
also claims that the stock market is an economic institution that promotes the growth and development of the
economy of a nation.

Inflation of prices also affects the stock market. It is because investors become concerned with the present value
of the stocks, which later on results to the impact of interest rates and inflation. On the contrary, there is also
what they call “inflation illusion,” which refers to how investors fail to see the growth in cash flow and profits
that happen during inflation (Warr, 2018).

Also, Bai (2014) analyzed the impact of inflation on stock prices, as proven when Kaur (2017) investigated the
existence of a relationship between the Indian stock market, inflation, and exchange rate. In the said study,
evidence indicated a positive and significant relationship between inflation and the stock market. This
phenomenon manifested itself in the local setup as stressed by the Philippine News Agency in which Villanueva
(2019) posited how Philippine’s 2019 inflation rate this March resulted in the decline of the stock exchange
index.

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 ISSN- 2394-5125 VOL 7, ISSUE 13, 2020

According to studies of Resatoglu & Tursoy (2018), Kaur (2017) and Babu (2017) the evidence of a significant
positive relationship between inflation and stock returns exists. On the contrary, (Rabbani & Jabbar, 2015),
Jepkemei (2017), Qamri, Abrar, Haq, & Akram (2015) found out that the inflation rate has a significant
negative relation with stock market performance. Nonetheless, despite the points of relationship
aforementioned, there remains a lot of debate regarding the effect of inflation on the stock market.

Different studies found out either positive or negative impact of inflation on the performance of the stock
market. Nonetheless, more evidence points to the positive significance of inflation to stock market performance
as perceived in the literature and studies found by the researchers. This findings provide the researcher with
enough justification in pursuing the direction of this study. Furthermore, preliminary investigations had led the
researcher to identify the fact that a minimal amount of studies of this nature has been conducted locally. One
such study was that of Sucuahi, Alvarez, Gudes, and Parsacala (2016), which aimed to determine the role of
inflation to stock price growth in certain companies. Results indicated that while there was a positive influence,
it is not significant.

Nonetheless, Bai (2014) also states that the current inflation momentum is fierce, and the stock market
turbulence is the fact that it does not dispute; we should find the measures to respond. The government
regulation and control of inflation determination are very huge still. We need to seize the main contradiction,
handle the relationship between them by good measures. Moreover, the government should take a prudent
monetary policy and proactive fiscal policy or take further measures. In the study of Babu (2017), he stressed
that the government should ensure that there is a stable macroeconomic environment that will ensure a high
economic growth rate. This economic condition will not only attract more investments in the economy but will
also ensure high returns to the investors in the stock market; this will spur further growth in different sectors of
the economy. The government should also ensure that it improves the living standard of the people to invest and
save in the stock market. This was also indicated by Villar (2018) in an article for the Business Mirror, wherein
he highly recommended the close monitoring of inflation because it is a predictor for sustaining the economic
gains of the nation.

Despite the numerous studies around the world, there have been no studies conducted locally. Contradicting
findings was also found out as the result of such numerous studies in different kinds of economies. The impact
of inflation was investigated, however, it can be noticed that multiple variables were included. This implies that
the variables’ relationship were not established in-depth. This, therefore, is what the researcher aimed to focus
on to establish deeper analysis between two sole variables only as moderated by the different categories in the
stock market.

This study determines the impact of inflation on stock market performance in the Philippines from 2014 to
2018. The null hypothesis for testing is: There is no significant relationship between inflation rate and stock
market performance when group according to the following category: Financial, Industrial, Holding Firms,
Property, Services, Mining & Oil, Small and Medium Enterprises and Exchange Traded Fund.

II. METHODOLOGY
Quantitative research was used to determine the relationship between inflation and stock market performance.
The data employed was a time series data for five (5) years from 2014-2018 taken from Bangko Sentral ng
Pilipinas published online. The variables were inflation and stock market performance where inflation rate as
the independent variable and the stock market performance as the dependent variable.
The data were analyzed and processed through the program Statistical Package for Social Science (SPSS).
Specifically, the Spearman Rank Order Correlation (rho) was used to determine the relationship between
inflation and stock market performance in terms of value traded and volume traded when grouped according to
category.

III. RESULT

Table 1: Relationship between Inflation Rate and Stock Market Performance in Terms of Value Traded
when Grouped According to Category
Category
Items Spearman's rho Sig. (2-tailed)
Correlation
Financial Category .061ns .643
Industrial Category -.316* .014

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 ISSN- 2394-5125 VOL 7, ISSUE 13, 2020

ns
Holding Firms Category -.185 .157
ns
Property Category -.088 .505
ns
Services Category -.043 .745
ns
Mining and Oil Category -.066 .616
Small and Medium Enterprise Category -.389** .002
**
Exchange-Traded Fund Category -.426 .001
ns.
**. Correlation is significant at the 0.01 level (2-tailed). Not Significant
*. Correlation is significant at the 0.05 level (2-tailed).

Table 1 shows the result of the investigation that there was negative moderate, substantial correlation between
inflation and exchange-traded fund having a significant correlation coefficient (rho = -.426**) at 0.01 level (2-
tailed) with a p-value of .001 (p<.05). Moreover, there was a negative low, small correlation for industrial and
small and medium enterprise categories having a significant correlation coefficient (rho = -.316* and rho = -
.389*) at 0.05 level (2-tailed) with a p-value of .014 and .002 respectively. The significant negative relationship
was also found out in the study of (Rabbani & Jabbar, 2015); (Jepkemei, 2017) and (Qamri, Abrar, Haq, &
Akram, 2015). The result implies that when the inflation increases, there is a possibility that the performance of
exchange-traded fund, industrial, and small and medium enterprise categories will decrease and vice versa. The
resulting relationship was inverse. Therefore, the null hypothesis is rejected; hence, there is a significant
relationship between inflation and the above categories. On the contrary, there was no significant relationship
between inflation and the stock market performance of the following: Financial, Holding Firms, Property,
Services, and Mining and Oil. Therefore, we accept the null hypothesis that there is no significant relationship
between inflation and stock market performance of the latter stated categories.

Table 2: Relationship between Inflation Rate and Stock Market Performance in Terms of Volume
Traded when Grouped According to Category
Category
Items Spearman's rho Sig. (2-tailed)
Correlation
Financial Category .053ns .685
Industrial Category .202ns .121
ns
Holding Firms Category -.032 .806
*
Property Category .325 .011
ns
Services Category .010 .938
ns
Mining and Oil Category -.171 .191
ns
Small and Medium Enterprise Category .029 .826
**
Exchange-Traded Fund Category -.403 .001
ns
**. Correlation is significant at the 0.01 level (2-tailed). . Not Significant
*. Correlation is significant at the 0.05 level (2-tailed).

Table 2 shows the result of the investigation that there was a negative moderate, substantial correlation between
inflation and exchange-traded fund having a significant correlation coefficient (rho = -.403**) at 0.01 level (2-
tailed) with a p-value of .001 (p < .05). Moreover, there was a positive low, small correlation for property
category having significant correlation coefficient (rho = .325 *) at 0.05 level (2-tailed) with a p-value of .011 (p
< .05). The significant negative relationship was also found out by (Rabbani & Jabbar, 2015); (Jepkemei, 2017)
and (Qamri et al., 2015). The result implies that there is a possibility that when the inflation increases, the
performance of exchange-traded fund will decrease and vice versa. Also, a direct relationship was found out
between inflation and property category. This significant positive relationship was also found out in the study of
(Resatoglu & Tursoy, 2018); (Kaur, 2017) and (Babu, 2017). This implies that there is a possibility that when
inflation increases, the performance of property will also increase and vice versa. Therefore, the null hypothesis
that there is no significant relationship between inflation and the above categories is rejected. On the contrary,
there was no significant relationship between inflation and the stock market performance of the following
categories: Financial, Industrial, Holding Firms, Services, Mining and Oil, and Small and Medium Enterprise.
Therefore, the null hypothesis that there is no significant relationship between inflation and stock market
performance of the latter stated categories is accepted.

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IV. CONCLUSIONS
In light of the findings, there is a possibility that the exchange-traded fund, industrial, and small and medium
enterprises categories in terms of value traded moves opposite with inflation. When inflation is high, the stated
categories possibly perform low and vice versa. In terms of volume traded, there is a possibility that exchange-
traded fund category moves opposite with inflation. On the contrary, there is a possibility that the property
category moves directly with inflation. Moreover, not all categories in the stock market are affected by the
movement of inflation, whether in terms of value traded and volume traded.

Based on the findings and conclusions drawn, investors in the stock market may consider the impact of inflation
in exchange-traded fund, industrial, and small and medium enterprise categories in terms of value traded. In
terms of volume traded, they may consider the impact of inflation in exchange-traded fund and property
categories. Investors may also invest in the stock market to hedge the risk of rising inflation because not all
categories in the stock market are affected. The policy makers may formulate policy to contain inflation at a low
level to increase the purchasing power of the people and may evaluate and revise the existing fiscal and
monetary policy to address the state of the economy at an inflationary period. Affected categories that perform
low when inflation is high may increase their level of performance by increasing their net income to declare
high dividends to attract investors. For categories that perform high when inflation is high may sustain its
performance or take advantage of the inflationary period. The companies may formulate strategies to mitigate or
lower the impact of inflation at an acceptable level to increase valuation to attract investors. Future researchers
may look for variables that may be more reliable to measure the stock market performance, and inclusion of
other macroeconomic variables is also encouraged.

V. REFERENCE

[1]. Bai, Z. (2014). Study on the Impact of Inflation on the Stock Market in China. International Journal of
Business and Social Science, 5(7), 261–271.
[2]. Bangko Sentral ng Pilipinas. Key Economic Indicators. Retrieved from
http://www.bsp.gov.ph/statistics/efs_real.asp
[3]. Dagar, A. (2014). Role of the Stock Market in the Economy Development. International Research Journal
of Management Science and Technology, 5(18), 86-92.
[4]. Geetha, C., Mohidin, R., Chandran, V. V., & Chong, V. (2011). The relationship between inflation and
stock market: Evidence from Malaysia, United States and China. International journal of economics and
management sciences, 1(2), 1-16.
[5]. IBON. (2018). Inflation – IBON Foundation. Retrieved from http://ibon.org/tag/inflation/
[6]. Jepkemei, B. (2017). The Impact of Inflation on Stock Market Liquidity: A Case of Nairobi Securities
Exchange, Kenya. International Journal of Economics, Commerce and Management, 5(1), 319–350.
[7]. Kaur, M. (2017). An impact of inflation and exchange rate on stock returns: Evidence from India.
Scholarly Research Journal for Interdisciplinary Studies, 4(37). doi:10.21922/srjis.v4i37.10524
[8]. Kelly, K. (2010, January 9). How the Stock Market and Economy Really Work | Kel Kelly. Retrieved
from https://mises.org/library/how-stock-market-and-economy-really-work
[9]. Ndlovu, B., Faisa, F., Resatoglu, N. G., & Türsoy, T. (2018). The Impact Macroeconomic Variables on
Stock Returns: A Case of the Johannesburg Stock Exchange. Romanian Statistical Review, (2).
[10]. Qamri, G. M., Abrar-ul-haq, M., & Akram, F. (2015). The Impact of Inflation on Stock Prices: Evidence
from Pakistan. Microeconomics and Macroeconomics, 3(4), 83–88.
[11]. Rabbani, M., & Jabbar, A. (2015). Factors Influencing on Stock Market in Pakistan, 7(28), 18–23.
[12]. Socioeconomic Research Portal for the Philippines. (2018). Socioeconomic issue on spotlight
INFLATION (8). Retrieved from Socioeconomic Research Portal for the Philippines website: https://serp-
p.pids.gov.ph/documents/SERP-P%20NEWS%20MARCH%202018.pdf
[13]. Sucuahi, W. T., & Alvarez, J. A. (2016). Influence of Inflation Rate to Stock Price Growth among
Diversified Companies in the Philippines. International Journal of Accounting Research, 2(12), 42-49.
doi:10.12816/0033282
[14]. Villanueva, J. (2019, April 4). Stocks, peso weaken ahead of March inflation report. Retrieved from
https://www.pna.gov.ph/articles/1066540
[15]. Villar, M. A. (2018, September 7). Monitoring inflation. Retrieved from
https://businessmirror.com.ph/2018/06/04/monitoring-inflation/
[16]. Warr, R. S. (2018, February 15). How the Threat of Inflation Affects the Stock Market. Retrieved from
https://psmag.com/economics/inflation-and-a-volatile-stock-market.

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