It is worrying when someone as erudite as the chief economist of the Bank of England warns that Brits need accept that they are now poorer. He was talking about the impact of inflation on household wealth.
Inflation is not just a UK problem, but it is something that people the world over are facing on an almost daily basis.
Huw Pill has laid the blame of inflation over the last 18 months on pandemic supply disruptions, and household support programmes that has boosted demand.
He also blamed the Russian invasion of Ukraine that resulted in a spike in European energy prices. Oh yes, he also blamed adverse weather conditions, and an outbreak of avian flu that has driven up food prices.
Anything else you want to throw into the mix, Huw? What about a lack of labour mobility, Brexit, and maybe protectionism?
Understandably, Huw Pill chose to steer clear of anything too controversial or politically sensitive. But he did urge workers to show restraint in pay discussions.
He said that people should stop trying to maintain their real spending power by bidding up prices, whether through higher wages or passing on higher costs to customers, etcetera.
Huw Pill is right up to a point. We could easily get sucked into a deadly inflation vortex if we are not careful. But he somehow conveniently chose to ignore the root cause of inflation. Perhaps it is because it hits too close to home. Perhaps it touches a raw nerve. Point is inflation is cause by too much money chasing a limited supply of goods and services.
And the reason why there is too much cash swirling around the global economy is because central banks printed too much of the stuff in the first place through Quantitative Easing. What’s more, they didn’t at that time – and they still don’t now – know how to withdraw the cash without creating financial havoc.
The harsh reality, therefore, is that inflation will probably be with us for a long time. We might need to learn how to live with higher prices and, in turn, how to cope with higher interest rates for a protracted period. From an investor’s perspective, there are obvious implications.
Stock markets could remain subdued as valuations are capped by higher interest rates. After all, share prices are inversely related to interest rates.
But not all shares may be impacted in exactly the same way. Share prices apart from being affected by interest rates are also a function of earnings. Consequently, companies that can demonstrate an ability to grow their earnings per share could be suitably rewarded.
So, look for companies that can grow their earnings. Those are likely to be businesses that have pricing power. That will become an increasingly important attribute as we go through a period of slower economic growth and higher inflation.
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Disclosure: David Kuo does not own any of the shares mentioned.