FIN 4131
Seminar In Finance
Effect of inflation on stock prices
Evidence from Sri Lanka
T.Thivaaniga
2017/BS/58
Department of finance & accountancy
Faculty Of Business Studies
Content

Identify the issue

Introduction about the issue

History of the issue

Research paper-related things

Research methodology

Critical evaluation

References

Conclusion
Identify the issue
Inflation
Introduction about the issue
Inflation is a rise in prices, which can be translated as the decline of
purchasing power over time.
When the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation corresponds to a
reduction in the purchasing power of money.
The rate at which purchasing power drops can be reflected in the
average price increase of a basket of selected goods and services
over some period of time.
The rise in prices, which is often expressed as a percentage, means
that a unit of currency effectively buys less than it did in prior
periods.
 high levels of inflation as well as hyperinflation—which have severely disruptive effects on the
real economy—are caused by persistent excessive growth in the money supply
 Low or moderate inflation may be attributed to fluctuations in real demand for goods and
services or changes in available supplies such as during scarcities
 Moderate inflation affects economies in both positive and negative ways.
 The negative effects would include an increase in the opportunity cost of holding money,
uncertainty over future inflation which may discourage investment and savings, and if inflation
were rapid enough, shortages of goods as consumers begin hoarding out of concern that
prices will increase in the future.
 Positive effects include reducing unemployment due to nominal wage rigidity, allowing the
central bank greater freedom in carrying out monetary policy, encouraging loans and
investment instead of money hoarding, and avoiding the inefficiencies associated with
deflation.
History of the Issue
Headline inflation, as measured by the year-on-year (Y-o-Y)
change in the Colombo Consumer Price Index (CCPI, 2013=100)
increased to 64.3% in August 2022 from 60.8% in July 2022.
This increase in Y-o-Y inflation was mainly driven by the monthly
increases in both Food and Non-Food categories.
 Accordingly, Food inflation (Y-o-Y) increased to 93.7% in August
2022 from 90.9% in July 2022, while Non-Food inflation (Y-o-Y)
increased to 50.2% in August 2022 from 46.5% in July 2022
Monthly change of CCPI recorded at 2.45% in August 2022 due to
price increases observed in items of both Food and Non-Food
categories which were 0.83% and 1.62%, respectively.
Accordingly, within the Food category, increases were observed in
the prices of fresh fish, fruits, bread, biscuits, eggs, and chicken.
 However, prices of rice and dhal decreased during the month.
Further, within the Non-Food category, increases were observed in
prices of Housing, Water, Electricity, Gas and Other Fuels (Electricity
bill and maintenance/reconstruction), Transport (Transport fare for
schooling and airfare), Clothing and Footwear, and Miscellaneous
Goods and Services sub-categories during the month.
Research paper related things
Topic- Effect of inflation on stock prices- Evidence from Sri Lanka.
Author-Silva.L,N.(2016)
Journal- International Journal of Scientific &Engineering,Vol.7(22295518)
Purpose- Help with investment decision making
Reducing risk to stakeholders
Research and methodology
Data period-2004 to 2014
Providing information by
Central bank-monthly inflations rate
CSE- monthly all share price index data
Dependent variable – stock price
Independent variable - inflation
Secondary data
Analysis method-Correlation
Researcher
Year
Opinon
Ibrahim & Agbaje
2013
long-run relationships and dinamic interaction between stock returns and
inflation in Nigeria using monthly data of the All Share Price Index from
the Nigerian Stock Exchange and Nigerian Consumers Price Index from
January 1997 to 2010.
there was evidence existed of a long-run relationship between stock
returns and inflation
Geetha etal
2011
 There is a long-run relationship between expected and unexpected
inflation with stock returns.
 There is no short-run relationship between these variables for Malaysia and
The United States exists in China.
Vanita &
Arnav
2014
 stocks are generally considered to be a good hedge against inflation
because of their tendency to move together.
 A significant negative relationship between the stock index and the inflation
rate in Russia.
 A significantly positive relationship between India & China.
Perera
2015
The inflation rate has a weaker impact in determining the Stock index on CSE.
Critical evaluation
All Share price index
 It is a value-weighted price index, which incorporates all the voting
ordinary shares listed on the CSE.
 The base year is 1985, and the base value of the index is 100.
 The ASPI indicates the price fluctuations of shares of all the listed
companies and covers all the traded shares of companies during a market
day.
Milanka Price Index (MPI)
 The CSE introduced the Milanka Price Index (MPI) on 4th January 1999.
Total Return Indices (TRI)
 Introduced in January 2004, the Total Return Indices are calculated daily in
addition to the Price Indices.
 The TRI is hence a better measure of returns from an investor’s perspective.
MBSL MidCap Index
 In a pioneering move, MBSL constructed a stock market index the “MBSL
MidCap Index”
 which measures the aggregate price level and price movement of the
medium size companies listed.
 on the Colombo Stock Exchange. MBSL MidCap Index was formulated
January 1999 by a private company for the first time in the history of the Sri
Lankan financial sector.
Conclusion
Sri Lanka is among the 10 countries around the world with the
highest inflation rate. high inflation is harmful. Research paper
identifies the relationship between inflation and stock price. The
monthly average inflation rate is observed as the independent
variable in this study. Some countries have long-run relationships
and some countries have short-run relationships with inflation and
stock prices. But Perera identifies The inflation rate has a weaker
impact in determining the Stock index on CSE.
Inflation growth rate affects Stock Returns positively. Despite the
positive relationship, it would be risky for an investor to merely
depend on the growth rates of variables.
References
Author-Silva.L,N. Effect of inflation on stock pricesEvidence from Sri Lanka. International Journal of
Scientific &Engineering.
THANK YOU