Impact of Consumer Price Index on Stock Prices

Abstract

Research in economics and finance documents a negative relationship between stock prices and CPI in markets of industrialized economies. This paper attempts to explore how far this holds true in the context of Pakistan’s macro economic environment, over the period of 2002 to June 2005. Monthly stock indices have been obtained from the KSE100 index for the period January 2002 to June 2005 and the monthly CPI values have been obtained from the Federal Bureau of Statistics for the same time period. The empirical methodology used is regression analysis and it is used to detect the magnitude and direction of the relationship under study. The results do not follow suit with the previous literature and show a significant positive relationship between the variables during the time period under consideration. However, the importance of this relationship can not be denied. It has had and may continue to have noteworthy implications for Pakistan’s economy.