Analysis of the Effect of Inflation on the Real Returns of Capital Market Investments in Nigeria

Inflation erodes the purchasing power of investment returns, and understanding its effect on real returns in the Nigerian capital market is essential for retail and institutional investors. This study analyses the effect of inflation on the real returns of capital market investments in Nigeria for the period 2010 to 2022. Secondary data were obtained from the Nigerian Exchange Group, the Central Bank of Nigeria Statistical Bulletin, and the National Bureau of Statistics. Capital market returns were proxied by the All-Share Index annual return, equity dividend yield, and fixed-income bond yield. Inflation was measured by the Consumer Price Index-based headline inflation rate. The Fisher effect hypothesis and the Ordinary Least Squares regression framework were used to examine the inflation-capital market return relationship. Results showed that a one percentage point increase in inflation was associated with a 0.78 percentage point reduction in real equity returns (coefficient = -0.78, p < 0.05), suggesting a partial Fisher effect. Fixed-income bond real yields were consistently negative during high-inflation periods (2016 to 2017 and 2022), eroding investor wealth. The study concludes that the Nigerian capital market does not provide an effective hedge against inflation, particularly for fixed-income instruments. It recommends that the Securities and Exchange Commission promote inflation-indexed bond products and that investors be educated on the importance of inflation-adjusted return computation in portfolio management. Keywords: inflation, real returns, capital market, All-Share Index, Fisher effect