Effect of Inflation on Stock Market Performance of Fast-Moving Consumer Goods Sector in Nigeria

Abstract

This study examines the impact of inflation on stock market performance within Nigeria's Fast-Moving Consumer Goods (FMCG) sector, spanning from 2007 to 2023. Employing a quantitative approach, the study uses time-series analysis, including ARDL (Autoregressive Distributed Lag) and Granger causality tests, to evaluate how inflation - proxied by broad money supply, inflation rate, interest rate, and market capitalization affects FMCG performance. The findings reveal a complex relationship between inflation and stock performance. Inflation negatively impacts FMCG stock performance in the short term, evidenced by decreased profitability and increased instability during high inflation periods. Conversely, a positive relationship emerges in the long term, suggesting that FMCG stocks can adapt and potentially benefit from inflationary environments over extended periods. Comparative analysis indicates that high inflation leads to greater challenges for FMCG stocks, including decreased profitability and pricing control issues, while low inflation fosters stable demand and improved financial performance. Broad money supply is found to significantly influence both inflation and stock market performance, with an increase in money supply correlating with higher inflation. Based on these insights, the study recommends that FMCG companies should adopt pricing strategies that would enhance cost efficiency, and pursue innovation and localization to mitigate the adverse effects of inflation. The study also explored the impact of inflation on specific sub-sectors within the FMCG industry to provide a more detailed understanding of these dynamics. This research contributes to the literature on inflation and stock market performance by highlighting sector-specific challenges and offering practical recommendations for navigating inflationary pressures in emerging markets.