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Does Inflation Have No Time To Die?

Whether it is Australia, New Zealand, or the United States, inflation is rising. Will central banks have to act fast to prevent economies from heating up too much, too fast? What does all this mean for investors?

October 22, 2021

Inflation is at a decade high in the US.

But before you think it’s a US-only issue, let me just say that it’s, at the moment, a worldwide phenomenon. For example, in New Zealand, surging construction costs, transportation costs thanks to rising petroleum prices, and increasing vegetable prices have contributed to a decade-high inflation print. The story is no different here in Australia. 

How sustainable are these price rises over the long term? That’s the trillion-dollar question, right? 

One way to think about the inflation issue is to look at government policies through the Covid crisis. During the depths of the coronavirus pandemic, the Australian government heavily subsidized child care. With that subsidy now gone, the price has recovered, contributing to the inflation print. This seems like a one-off event, right?

What about the increase in prices for fruits and vegetables? Some of that is a function of the surge in petroleum prices. But during the depths of the pandemic, mobility had come to a standstill. As mobility recovers, there’s increased demand for fuel, which is pressuring prices. This, too, appears to be non-repeatable as we reach pre-Covid levels of travel.

What about the shortage in semiconductors plaguing the automotive sector?

From what I have read, it looks like the shortage is in mundane chips, and these go into things like airbags, brakes, or seats. It is worth noting that pre-pandemic, there was a plentiful supply of these hardware elements. So, how come there’s a shortage and rising prices? 

I know we went crazy buying cars, SUVs, and utes (pickup trucks in the US) here in Australia. With lockdowns, nowhere to go, and generous government support programs, many households had extra income and fewer avenues to spend. The Australian government even introduced asset write-off plans for businesses, encouraging small businesses to upgrade their vehicles and various other hard assets.

So, on the one hand, we had increasing demand. On the other hand, we had massive supply chain disruptions at critical manufacturing hubs in Asia. More demand, less supply, and economics 101 dictate price increases! But how sustainable is all of this? 

Those who upgraded their vehicles are unlikely to change it again soon. As vaccination programs make their way through Asia, manufacturing will return full steam. In my view, it is possible that next year, at this time, we are worrying about deflation!

So what am I doing? 

Honestly, I am not doing anything different. 

I’m not saying inflation doesn’t matter, it does, but not as much as some might make it out to be. Or maybe, I should say it doesn’t matter much to my investing.

I generally invest in high-growth companies. Market leaders. Or those that will be the Gold medal winners at tomorrow’s championship podium. These companies can pass on price increases. Plus, and more importantly, growth is often the cure for many ills!

The one significant impact of inflation is valuation. If inflation remains stubbornly high for too long, the Federal Reserve will have to act decisively to cool down the economy before it hits boiling temperature. We know that rising rates negatively impact valuations. So, I suspect there will be plenty of volatility if rates increase at a much quicker pace than expected. 

However, I will reiterate that I don’t think what we are seeing is the new normal. Technology and globalization have a deflationary effect on prices, and I see no reason that should change anytime soon. Much of the pandemic-related temporary changes should normalize in due course. 

And while I don’t believe that inflation is here to stay, I don’t think companies like Apple (NASDAQ: AAPL), Tesla (NASDAQ: TSLA), or Amazon (NASDAQ: AMZN), to name a few, will have any issues passing some of the increasing costs to the buyers. More broadly, companies with must-have services or products will do just fine. If anything, an inflationary environment is not great for the lower quality businesses, but then I avoid those like the plague anyways!

Bottom line, I am not too worried about inflation. My plan is to continue regularly investing in the best ideas I can find. 

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