Why I am not worried about inflation

Updated: Feb 15

Inflation, it seems, is everywhere. Prices seem to be going up for everything - daily items like milk and groceries to things like cars and houses.


Inflation is like cricket – everyone has an opinion on it.


So, why am I not worried about Inflation? Well, before that, let us see what is causing this inflation?


What is driving this inflation


The twin effects of supply and demand are what is making this inflation stand out. Consumers, especially in developed economies, have money to spend which is driving up prices. And there is less stuff for them to buy because of a shortage of workers and transportation bottlenecks in many geographies, further increasing prices.


A massive amount of money has been printed across the world. Governments have issued new money to help people deal with the effects of the global pandemic. As a result, consumers now have extra money that they can use to buy things. This pushes up prices globally and also impacts Indian customers.


On the other hand, fewer things are being produced because of the great resignation or zero COVID policy in China. This lack of workers impacts everything – from the production of raw materials to the manufacture of finished goods.


On top of that, companies are realizing that even if they can somehow manufacture things, it is getting harder to transport them to the consumers. There are significant shipping delays, a shortage of truckers and port closures.


Why I think this inflation may not last


The inflation will not last for the exact same reasons that are causing this inflation in the first place - supply and demand.


Given how prices have shot up - the invisible hand will make sure that supply will rise. This will take some time since supply does not ramp up overnight - but it will happen.


Also, demand will wane with rising prices. There is only so much more someone will pay for their cup of coffee before they decide to make it at home or decide to drink (the bland) office coffee!


The transportation bottlenecks are also something that will get resolved soon. There is just too much innovation happening in this area to let these problems persist for long.


Lastly, there is the powerful undercurrent of technology and automation that will take care of the labor shortage. Every company on earth has adapted over the last couple of years to make do with less staff and this trend is only getting started.


Again, all this will not happen overnight, but I think inflation will be more of a 2021 story than a 2022 story.


What am I doing to fight inflation


Well, not much, really. I am not making any changes to my investments. One reason is that I think the inflation scare will go away next year.


The other reason is that owning assets like stocks and real estate is a good way to deal with inflation. Almost everyone owns a house; and houses go up in value as inflation rises. In India too the real estate cycle seems to be turning.


Most of my investment is in stocks. Stocks - especially of companies that have pricing power - do well in an inflationary environment. These companies are able to pass on a large part of the higher costs to their consumers, so there is minimal impact on their margins.


UBS recently published a list of 10 companies with strong pricing power, as did other banks. Investing in a broad-based, low-cost index fund like Vanguard S&P 500 ETF (VOO) (like Nifty 50 Index ETF( already provides me with exposure to these companies.


Lastly, I think being frugal helps - not just during times of inflation but as an overall lifestyle choice.


 

About the Author

  • Mr. FINER (Financially Independent Not Early Retired) - Find me on Twitter

  • Salaried employee who achieved Financial Independence (FI) by frugality, sound investing… and most of all, patience.

 



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