Inflation has been rampant lately. The rate at which prices have been climbing has hit a level we haven’t seen in ages. To find a similar time, you’d have to look back to the early 80s. For a long time, the big talk was about how inflation was too low, with some even worrying about deflation, which means prices are dropping instead of going up.
Why Inflation Was Low for So Long
Back in 2012, the Federal Reserve, let’s call them the nation’s money managers, set a goal to keep inflation at a steady 2% per year. Hitting this target proved harder than expected, and it led some people to believe that rising prices wouldn’t be a big deal in the future. Inflation is really all about how much stuff is available versus how many people want it. If a lot of people want something that isn’t available in large quantities, prices go up. For example, during 2020 and 2021, the government made it easier for people to have money through direct payments and low borrowing costs. This meant that more people had the means to buy things like used cars. At the same time, car manufacturers were struggling to get the parts they needed, so fewer new cars were being made. With fewer new cars, people kept their older ones longer, and the number of used cars for sale went down. This mismatch led to a spike in used car prices.
Billionaire Investor Bill Ackman Believes Inflation is Here to Stay
Bill Ackman, the billionaire investor who runs Pershing Square Capital Management, has a hunch that the prices climbing all around us aren’t just a temporary thing. He’s looking at the big picture and seeing a bunch of changes that hint at this sticking around. For one, the whole world is in a bit of a shuffle politically and economically. Things are moving around in ways we haven’t seen before. Also, it’s getting pricier to make stuff overseas, which used to be a bargain. At the same time, people who work for a living are standing up for bigger paychecks, and that’s changing the game too. Then there’s the big leap towards green energy, which isn’t coming cheap. And have you seen the gas prices lately? They’re so high that everyone’s starting to think that digging deeper into our wallets might just be the way things are going to be from now on. Now the Federal Reserve, those folks who try to keep our money worth something, might just keep cranking up the cost of borrowing money. They’re hoping this will cool things down a bit on the price front. Sure, they managed to get a grip on inflation for now, pulling it down from sky-high levels. But if Ackman’s right, and prices stay stubbornly high, we might see those interest rates climbing even higher.
How To Invest If Inflation Stays High
That’s a situation that usually makes investors nervous and can send the stock market on a bit of a rollercoaster ride. Ackman, though, he’s not sweating it. He seems to think that like everything else, we’ll adapt to this new money landscape. Ackman believes many businesses can do well in a world of 3% inflation. The key is owning businesses that have pricing power – businesses that can raise prices without losing customers. For example, Ackman owns Universal Music, which collects royalties for music streaming. If there’s more music streaming, Universal earns more, regardless of inflation. Google is another example. It earns money from advertising online, so as long as people keep searching and watching YouTube, Google keeps raking in ad revenue. Restaurant Brands International, owner of Burger King and Popeyes, collects franchise fees based on sales. As sales rise with inflation, so does RBI’s revenue. The beauty of these kinds of businesses is that inflation is their friend, as long as costs don’t rise faster than revenue. Ackman feels comfortable owning companies like these even if inflation stays high. Historically, valuations have assumed higher interest rates, like 9-10%. With rates artificially low for years, stocks have been priced higher than usual. As rates normalize, valuations could come down, but earnings for companies with pricing power may offset this.
Key Takeaways
Inflation is at its highest level in 40 years after years of being too low Billionaire investor Bill Ackman believes high inflation is here to stay The key is to invest in companies with pricing power that can raise prices without losing customers Look for companies like Universal Music, Alphabet, and Restaurant Brands that earn “royalties” on economic activity These royalty-like companies can thrive in inflationary environments as revenue grows with inflation Inflation may be uncomfortable for consumers, but for investors who pick the right stocks, high inflation doesn’t have to be a portfolio killer. Companies with strong brands and pricing power can pass higher costs onto customers and see earnings rise along with inflation. That makes this the perfect time to fill your portfolio with companies built to weather inflationary storms.