It would appear, on the face of it at least, that consumers might be one step ahead of many academics, experts and, more importantly, central bankers when it comes to the outlook for inflation. Just ask a roomful of consumers and you might find a significant number are concerned about rising prices. Meanwhile, many experts are assuring the markets that inflation is unlikely to be a problem. Their argument is that there is excess capacity in global economies. Consequently, with supply exceeding demand, they do not believe that prices are likely to rise. They have a point. However, many…
Just ask a roomful of consumers and you might find a significant number are concerned about rising prices. Meanwhile, many experts are assuring the markets that inflation is unlikely to be a problem. Their argument is that there is excess capacity in global economies. Consequently, with supply exceeding demand, they do not believe that prices are likely to rise. They have a point.
However, many consumers remain unconvinced, and they might have a point too.
The unprecedented amount of money that has been created since the financial crisis of 2007 could, in time, prove them, rather than the experts, right. Truth is, it is hard to imagine how the pumping of more than $12 trillion into global economies by a number of central banks can be anything other than inflationary. The danger for savers is that inflation erodes the buying power of money.
Over the long term, investing in the stock market has been a good way to ensure that your savings can beat inflation. Historically, the stock market as measured by the Straits Times Index (SGX: ^STI) has nominally returned around 8%, which is higher than the rate at which the price of consumer goods has been rising.
The reason for the above-average return is simple – companies have to pass on price increases if they want to stay in business. Failing to do so would inevitably result in dwindling profits. However, not all companies can easily increase prices. Therefore investors should try to focus on those that can if they believe inflation is likely to be a problem.
Utility companies such as Sembcorp Industries (SGX: U96) could be one of those that could pass on price increases. The harsh reality is that as demand for energy increases, so too will prices. The cost increases must either be met by users through higher tariffs or through government subsidies, which could be met indirectly, say, through tax increases. There are no free lunches.
Pharmaceuticals and biotechnology companies such as Biosensors International (SGX: B20) could also be seen as inflation-proof. For instance, if you are in need of specific medication or treatment, it is unlikely that cost will figure highly on your list of selection criteria. Of course pharmaceuticals have some industry-specific risks but reticence to pass on inflation-linked cost increases is unlikely to be one of them.
Food is another industry that can be largely resistant to inflation. Consumers, admittedly, might trade down or put less into their shopping baskets. However, companies with a wide geographic footprint could find that a slowdown in one region could be compensated by higher growth elsewhere. Some of the more geographically diversified food companies in Singapore include Del Monte Pacific (SGX: D03) and Dairy Farm International (SGX: D01), which generates half its revenue in North Asia and a quarter from East Asia and Southeast Asia.
Central bankers, it would seem, are no longer interested in targeting inflation or to even talk about inflation. Admittedly, we are unlikely to see a return to the inflationary times of the 1970s. Nevertheless, sustained inflation coupled with long periods of below-inflation wage growth and low interest rates could put a painful squeeze on the real disposable income of consumers.
Precisely how long this could last is debatable. But given the need for inflation to erode the massive debts that have been accumulated by many economies, it could last a very long time indeed.
A version of this article first appeared in the Independent on Sunday.
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