The impact of inflation on growth of market index

Inflation in Indonesia tends to fluctuate and has its lowest point in April 2023. This study aims to examine the relationship between inflation and market indexes in Indonesia. The sample for this study is the market index (or IHSG) for the period from January to April 2023. This study finds that inflation has a unidirectional relationship with the movement of the market index in Indonesia. In addition, this study finds that the growth of the market index throughout the observation period is 0.012%. The results of this study indicate that there is a stable condition in the capital market as the controlled inflation rates.


Introduction
Inflation is a macroeconomic indicator in determining economic growth. Salim et al. (2021), and Dwi and Pasaribu (2023) prove that inflation and economic growth have a positive relationship. This implies that an increase in inflation under certain conditions reflects good economic growth. On the other hand, the rising of inflation relatively does not directly affect the movement of stock index values in the Indonesian capital market (Fitriani et al., 2020;Ficsanes, 2022;Setiana & Permadhy, 2022;Hasnawati et al., 2023). Moreover, the findings of Fitriani et al. (2020), and Fitriyah and Abidin (2020) also imply that interest rates tend to increase as a controlling factor if there is an increase in inflation. As a result, the stock market index tends to decline as a result of rising interest rates (Sampurna, 2016;Fitriani et al., 2020). Figure 1 shows inflation and Indonesian market index during period January 2020 to April 2023.
Since 2022, Indonesia's economic conditions have begun to be affected by the issue of increasing national inflation. The issue continues until March 2023 as inflation tends to decrease in response to the government's interest rate policy. In addition, the monthly average development of the Composite Stock Price Index (IHSG) tends to increase since the beginning of 2023 to April 2023 since the COVID-19 pandemic. This study aims to examine the relationship of inflation and IHSG and also to determine the growth of the IHSG for first four month of 2023 in the context of the inflation issue.

Literature review
Empirically, the relationship between inflation and the IHSG has different results. Zulfa andTan (2009), Asih andAkbar (2016), and Daffa (2023) report that increasing inflation in Indonesia tends to have a positive and significant impact on the market index or IHSG. In contrast, Ahmad and Badri (2022), and Al-Hanif et al. (2023) prove that any increase in inflation tends to be followed by a significant decrease in the market index. Other evidence from Fitriani et al. (2020), Setiana and Permadhy (2022), Hasnawati et al. (2023), Liantanu et al. (2023), and Wulan et al. (2023) find that inflation has no significant impact on the IHSG. H1: Inflation has significant relationship on market index

Research method
In accordance with the objectives of this study, the observation period for inflation and the IHSG is carried out from January 2023 to April 2023. Based on the observation period, the number of samples used in this study is 76 observed data. The three variables used in this study are market index (symbolized by IHSG), inflation (symbolized by INF), and the rate of return of IHSG (symbolized by Return). IHSG is obtained from the Indonesia Stock Exchange while inflation is obtained from the Indonesian Central Bank. The Return is calculated by the formula as follows.
In terms of hypothesis testing, this study uses correlation and analysis of variance (ANOVA) tests. The correlation test aims to determine the relationship between inflation and the IHSG while the ANOVA aims to determine the difference between the IHSG and Return between periods. At this stage, inflation is controlled based on the time, which is January (Jan) when the rate is 5.28%, February (Feb) when the rate is 5.47%, March (Mar) when the rate is 4.97%, and April (Apr) when the rate is 4.33%. Table 1 shows that the IHSG fluctuated from January to March but increased again in April when low inflation. This indicates that the market index has better conditions when decreases inflation. In addition, the Return also has the highest mean when inflation is at its lowest point in April, thus indicating that market returns have performed quite well when inflation has decreased. Moreover, the standard deviation (SD) also decreased in April, thus indicating less volatile market conditions. Consistently, both IHSG and Return have positive skewness which indicates a passive stock movement. Complimentary, this study calculates the geometric mean of Return and finds that the growth of market returns from January to April is 0.012%. Notice the work of Giri (2008), the growth of IHSG tends to be caused by good economic growth which followed by decrease in the inflation rate. This study continues the next stage by carrying out a normality test which is the basic assumption in conducting correlation tests and ANOVA. Table 2 presents the results of the normality test using the Kolmogorov-Smirnov test. The results of the analysis at the 5% level show that the IHSG and Return are normally distributed while inflation is not normally distributed. Based on the normality test, this study conducted a non-parametric correlation test (Kendall's tau). Table 3 presents the correlation matrix between inflation and the IHSG which is at the level of 5%. This study finds that inflation has a positive and significant relationship with the IHSG. This result implies that inflation has a unidirectional relationship with the IHSG or in the sense that an increase in inflation will be accompanied by an increase in the IHSG so hypothesis (H1) of this study can be accepted. On this finding, this study is consistent with the findings of Zulfa and Tan (2009), Asih and Akbar (2016), and Daffa (2023). Otherwise, the finding of this study is inconsistent with the findings of Ahmad and Badri (2022), Al-Hanif et al. (2023), Fitriani et al. (2020), Setiana and Permadhy (2022), Hasnawati et al. (2023), Liantanu et al. (2023), and Wulan et al. (2023). Refers to Salim et al. (2021), and Dwi and Pasaribu (2023), the results of this study also indicate that Indonesia is experiencing better economic growth as reflected in the IHSG growth of 0.012% and a controlled inflation rate.  Table 4 presents the results of ANOVA at the level of significance at 5%. The results show that there are significant differences between periods for the IHSG while the differences in Returns between periods are insignificant. BG is between groups, WG is within groups, SS is sum of squares, MS is mean square, and ** is level of significance at 5% Furthermore, Table 5 shows that the variances of IHSG are not assumed while the variances of Return are assumed at level of 5%. On those results, the difference test for IHSG uses the Games-   Table 6 presents the results of the posthoc tests for IHSG (based on the Games-Howell test) and Return (based on the Bonferroni test). The results of the analysis show that Feb has the highest IHSG significantly compared to Jan, Mar, and Apr. However, the results of the analysis also show that the Return during the period of Jan to Apr does not experience a significant difference, thus indicating a similar market index performance.

Conclusion
In early 2023, the issue of inflation becomes public concern in Indonesia related to economic growth and capital market conditions. The purpose of this study is to examine the relationship between inflation and the market index in Indonesia and finds a unidirectional and significant relationship. This result implies that an increase in inflation will be accompanied by an increase in the market index. In addition, this study also finds that during the period from January to April 2023, the market index in Indonesia grew by 0.012%. These results indicate that Indonesia is experiencing good economic growth with the controlled inflation rate.