Inflation & Stock Market

Malaysia July inflation at 1.1% rises at slowest pace in more than a year

KUALA LUMPUR (NewsRise) – Malaysia’s July retail inflation rate decelerated further, rising at its slowest pace in more than a year, as cheaper transport charges helped offset impact from costlier food, official data showed Wednesday.

The consumer price index — Malaysia’s primary gauge for inflation – rose 1.1% in July from a year earlier, the Department of Statistics said in a statement. That compares to June’s 1.6% year-on-year increase and lagged the median 1.2% rise predicted by economists. On a seasonally adjusted basis, the index rose 0.3% from June.

The latest reading marks the fifth straight month of price decline after annual retail inflation printed a seven-year peak of 4.2% in February.

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Inflation & Stock Market Returns

High inflation can be good, as it can stimulate some job growth. But high inflation can also impact corporate profits through higher input costs. This causes corporations to worry about the future and stop hiring, negatively impacting the standard of living of individuals, especially those on fixed incomes. Because there is no one good answer, individual investors must sift through the confusion to make wise decisions on how to invest in periods of inflation. Different groups of stocks seem to perform better during periods of high inflation.

Most studies conclude that expected inflation can either positively or negatively impact stocks, depending on the ability to hedge and the government’s monetary policy. But unexpected inflation did show more conclusive findings, most notably being a strong positive correlation to stock returns during economic contractions, demonstrating that the timing of the economic cycle is particularly important for investors to gauge the impact on stock returns. This correlation is also thought to stem from the fact that unexpected inflation contains new information about future prices. Similarly, greater volatility of stock movements was correlated with higher inflation rates

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Inflation & FBMKLCI

Based upon historical data of Malaysia’s FBMKLCI and inflation rate:

  • Generally, there appears to be positive correlation between inflation rate and FBMKLCI
  • When there is a divergence (e.g rise in FBMKLCI not matched with a rising inflation rate), FBMKLCI tends to reverse
  • With the latest inflation number (July 16) showing a slowing trend, we may potentially see a downward trajectory for the FBMKLCI

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Author: Ken Utau

Markets Observer + Food Lover