Abstract:

Households tend to increase their spending as income increases which could have significant impact on inflation in any economy. Millions of households have lost and made incredible wealth in the stock market; however, economic and finance literatures have not focused on how changes in stock prices which influence household wealth and spending behaviour could be useful in forecasting inflation. Therefore, this study investigates stock prices and inflation in Nigeria between 1985 and 2018. It employs a Cross Correlation test to establish the cyclical relationship between market capitalization (a proxy for stock prices) and inflation. The study found that inflation tends to rise when stock prices are falling and inflation falls when stock prices are rising. Based on the findings of this study, it was recommended that monetary policy makers may choose to use its control of the discount factor to influence stock prices movements and indirectly control future inflation through stock market cycles in both the short run and long run. Such that by extending stock market cycles, inflation could decline for an extended period of time.