THE ROLE OF STOCK PRICES CYCLES IN FORECASTING INFLATION IN NIGERIA

The trend of inflation in Nigeria has been startling and there was relatively little knowledge of how volatility in stock market prices could influence future inflation in Nigeria. The objective of this study is to determine how inflation trends could be explained by stock market booms and burst. To achieve the stated objective, the study applied the Hodrick-Prescott Filter and Contemporaneous Correlation test on secondary dataset for Nigeria from 1985-2017. The secondary dataset were gathered from the Central Bank of Nigeria statistical bulletin and the Nigerian Bureau of Statistics Annual Statistical Report. Variables relevant to the objective of the study like CPI (consumer price index or inflation) and MCAP/GDP (stock market capitalization to GDP) were analyzed. Findings from the Contemporaneous Correlation test revealed that there is a countercyclical relationship between stock prices and inflation rate. This means that changes in inflation rate happen after changes or fluctuations in stock prices. The Hodrick-Prescott Filter confirmed this finding by showing that this relationship between stock prices and inflation is evident in the past behaviour of inflation and stock prices. This implies that inflation tends to rise when stock prices are falling and inflation falls when stock prices are rising. The study hence, recommends that policies that extend the stock market cycles should be adopted as it has been proven to reduce the inflation rate significantly.