Was the Fed being deliberately vague about the direction of interest rates or does it really not know what it will do at the next meeting? The rate-setter’s next powwow won’t be until September. So, we can thank our lucky stars that we don’t have to listen to the endless opinions from so-called experts about what the Fed will or will not do next. As if these guys even know, when the Fed doesn’t even know itself.
Point is, none of us know. Nor should we care. What we can say, though, is that inflation is proving to be sticky. And as much as the Fed would like to engineer a soft landing, even it knows that it is impossible to make an omelette without breaking eggs.
Consequently, we might to accept that we are not so much at the beginning of the end of inflation but at the end of the beginning of inflation. We still have a long way to go before inflation is brought under control.
Even the Fed has admitted as much. Fed chair, Jerome Powell, has expressed uncertainty about achieving its 2% target by 2025. That is nearly two years away. So, we might have to live with interest rates being higher for longer.
Mind you, the Fed could be wrong. It won’t be the first time, nor the last time, that the central bank’s forecasts have been incorrect. But that’s really not the point. Whether interest rates are higher or lower shouldn’t affect the way that we invest. If the recent crop of earnings has taught us anything, it is that good businesses can survive even in the harshest of conditions.
Take Coca-Cola as an example. It has said that demand for its soft drinks has been unaffected by price hikes. Profit at PepsiCo nearly doubled after double-digit price increases. Earnings at Unilever jumped by a fifth after it increased prices by nearly 10%. Meanwhile, profit at McDonald’s almost doubled in the second quarter.
Those are the kind of companies that we should be paying closer attention to. Their secret to success is pricing power. They have the ability to raise prices without losing business to competitors. Not all companies achieve that. But those that can could be some of the best placed to cope with inflationary pressures and deal with economic slowdown at the same time.
David owns shares in Coca-Cola, PepsiCo, Unilever and McDonald’s through DKIP’s Asian Consumer Portfolio.
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