The Reaction of Stock Prices to Unexpected Inflation

Christo Auret and W Rudolph

Studies in Economics and Econometrics, 2006, vol. 30, issue 1, 23-40

Abstract: This study analyses the reaction of daily stock prices on the JSE Securities Exchange to new information about inflation, contained in the announcement of the Consumer Price Index (CPI). Three different prediction models for inflation are compared. It is shown that a model based on the time-series of past inflation announcements performs as well, if not better, than a model based on the time-series of real rates of return. However, both these models are shown to be far more accurate predictors of inflation than a simple interest rate model. The results of a multiple regression model for stock returns based on unexpected inflation reveal that there is no significant reaction of stock prices to the information contained in CPI announcements. This suggests that such announcements do not really convey new information to the market, and that the announcement figure is already impounded into stock prices well before the actual announcement date. This evidence suggests that the JSE Securities Exchange may show stronger evidence of efficiency than previously believed.

Date: 2006
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DOI: 10.1080/10800379.2006.12106398

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