European Inflation and the Spanish Stock Market

Abstract

This study examines the short-run response of daily stock prices in the Spanish market to the announcements of inflation news at a sector level at the moments when the Spanish authorities announced the IPC (consumer price index) during the period 1995–2004. The study also incorporates two novel explanatory variables: core inflation and ‘non-core’ inflation rate components on the one hand, and the spread between the Spanish and European inflation rates (harmonized) on the other hand. It is concluded that the ‘non-core’ component of the inflation rate, which is more volatile, has negative effects on some sector returns; additionally, in drawing too far apart from the European inflation rate, the Spanish inflation rate negatively affects sector returns, such as in the ‘Consumer Goods’ sector, which is subject to strong foreign competition. In the long-term analysis, the lagged core inflation (structural component) negatively affects sector returns.