Headline #1: “Higher wages, costs and consumer prices ahead”
Headline #2: “RBI raises rate, warns inflation will remain high”
And here’s a third that really got me thinking.
Headline #3: “Minimum wages in Jakarta raised 11%”
I don’t know about you but I am beginning to see a picture starting to form.
It seems that just when we thought that there was no need to worry about inflation, than the dreaded “I” word makes an unwelcome appearance in our neck of the woods.
But have you ever thought about what inflation actually means?
What is inflation?
Interestingly, inflation can mean different things to different people.
As far as consumers are concerned, it usually revolves around the rising cost of food at supermarkets. But if you ask economists, they might talk about an oversupply of money or an imbalance between supply and demand for goods and services.
In simple terms, though, inflation is rate at which the dollar in your pocket is shrinking. So, when you hear that the inflation rate is 3%, it means that a judiciously chosen basket of goods that cost $100 last year would set you back $103 today.
Another way of looking at inflation is to say that if you paid $100 for a basket of goods last year, and if you still only wanted to spend $100 today, then you would need to put 3% fewer things in the basket.
But what can we do about inflation?
If you assume that inflation is rising at 3% a year, then it implies that the price of goods and services could double every 24 years. In other words, if a pair of flip-flops cost $10 today, then in two decades’ time, the “flip” could cost you $10, but the “flop” might cost you another $10.
When we talk about inflation, though, it is important to gauge how rising prices are affecting every one of us personally, rather than how it impacts the average consumer. That’s because we are all individuals and we all experience rising prices in slightly different ways.
For instance, if you enjoy eating out regularly, then you may experience higher inflation than someone who mostly eats at home. After all, cooked food can account for about a-seventh of average household expenditure in Singapore. What’s more, rising labour and rental costs might mean that restaurants have to continue defraying their cost increases, if they want to stay in business.
The power of pricing
But not all restaurants might be able to pass on higher operating costs seamlessly. Those that can should be able to maintain their operating margins. But those that can’t, might see their margins shrink, or worst still, they might even be forced to hang up their apron.
When investing in shares, which are a good way to protect our savings against inflation, it is important to think about the pricing power of companies. For instance, are the businesses that you own shares in, able to raise prices without adversely impacting performance?
Within the Straits Times Index (SGX: ^STI), telecom operators such as SingTel (SGX: Z74) and StarHub (SGX: CC3) might be said to have pricing power. Elsewhere, aircraft-maintenance company SIA Engineering (SGX: S59) and defence contractor Singapore Technologies Engineering (SGX: S63) might also be able to pass on price increases without too much of a palaver.
But not all businesses can.
Warren Buffett once said: “The single most important decision in evaluating a business is pricing power.”
He added: “If you have the power to raise prices without losing business to a competitor, then you have a very good business.”
But he cautioned: “If you have to hold a prayer session before raising prices by 10%, then you have a terrible business.”
So, take good look at the companies in your portfolio and ask yourself if you are invested in “very good businesses“. In other words, are the managers in control of events or are events controlling the managers?
A version of this article first appeared in Take Stock Singapore
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