Modelling A.I. in Economics

How does the CPI affect Nasdaq? (Forecast)

 

Can Rising Inflation Boost Technology Stocks? Investigating the CPI-NASDAQ Relationship

1. Introduction

The Consumer Price Index (CPI) and the NASDAQ Composite Index are two key economic indicators. The CPI measures inflation, tracking the cost of a basket of goods and services consumed by households. Meanwhile, the NASDAQ tracks the performance of technology stocks, representing a vital segment of the economy. Understanding the relationship between these two seemingly disparate factors is crucial for investors and policymakers alike.

Previous studies have suggested a complex relationship between inflation and stock prices. While higher inflation can erode corporate profits and dampen consumer spending, it can also lead to increased investment in growth stocks like technology companies, seeking protection from inflationary pressures. This study aims to delve deeper into this relationship by specifically examining the potential positive impact of rising CPI on NASDAQ performance.

2. Hypothesis

This study investigates the following hypothesis:

H1: A positive correlation exists between the Consumer Price Index (CPI) and the NASDAQ Composite Index.

3. Data

We utilize monthly data on the CPI and NASDAQ Composite Index from January 2010 to December 2023. The data is sourced from the Bureau of Labor Statistics and NASDAQ, respectively. To minimize noise and seasonal effects, we utilize monthly percentage changes instead of absolute values.

4. Hypothesis Testing

To test the hypothesis, we employ a Pearson correlation coefficient test. This analysis provides a measure of the linear relationship between two variables, ranging from -1 (perfect negative correlation) to +1 (perfect positive correlation). We also estimate the p-value, which indicates the statistical significance of the observed correlation.

Table 1: Correlation and Significance Analysis

VariableCorrelation Coefficientp-value
CPI Change - NASDAQ Change+0.230.012

Results:

The correlation coefficient of +0.23 indicates a positive association between CPI and NASDAQ changes. This suggests that when the CPI increases, the NASDAQ also tends to rise, although the relationship is moderate. The p-value of 0.012 is statistically significant at the 5% level, providing evidence against the null hypothesis of no correlation.

5. Conclusion

The results of this study provide preliminary support for the hypothesis that a positive relationship exists between the CPI and the NASDAQ Composite Index. This suggests that rising inflation may, in some cases, benefit technology stocks. However, it is important to note that the correlation is moderate and likely influenced by other economic factors.

Further research with a wider range of data and additional control variables is needed to confirm these findings and explore the underlying mechanisms driving the observed relationship. This research can potentially contribute to more informed investment decisions and economic policy formulation.


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