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Analyzing the Impact of Inflation on the UK Stock Market: A Focus on the FTSE 100 Index

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  • Ma, Nana

Abstract

This study investigates the relationship between inflation and the UK stock market by focusing on the FTSE 100 Index. Utilizing a two-stage regression approach, it examines both immediate and lagged effects of inflation, incorporating macroeconomic variables such as exchange rate (EXC) and unemployment rate (UN). The empirical analysis is conducted over two sub-periods (2018–2021 and 2021–2023), with diagnostic tests including ADF, VIF, White heteroskedasticity, and Breusch–Godfrey serial correlation. OLS estimates are corrected using Newey-West standard errors. Results indicate limited short-term impact of inflation on FTSE 100, but a near-significant effect with a first-order lag. Exchange rate and unemployment are found to be dominant explanatory factors. The study concludes with implications for monetary policy, and ESG investment strategies.

Suggested Citation

  • Ma, Nana, 2024. "Analyzing the Impact of Inflation on the UK Stock Market: A Focus on the FTSE 100 Index," MPRA Paper 125301, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125301
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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