What Causes Inflation?
When more people have jobs and when wages rise, there are more dollars trying to buy what is probably a limited supply of something or some service. For example, if everyone in my neighborhood wanted a kitchen remodel, and they all had received a bonus or a big wage increase, but there was only one kitchen remodeler within a 50-mile radius, the remodeler could raise the price for the cabinets, flooring, tiles, and labor. What might have cost $10,000 might cost $15,000.
Another cause can be government restrictions in supply. For example, if the government of the United States was to decide pipelines were a bad idea, that drilling for oil was a bad idea, or that oil exploration was a bad idea, consumers would have to buy supplies from the Mideast, Venezuela, and perhaps Russia. The supply went down, so those still producing the products could raise their prices on the global market. The increase in petroleum prices, by the way, could also impact the costs of plastics used in most industries including consumer food products, automobile components, computers, fast food containers, and lawn edging.
Why Inflation Matters
Even in the best of times, inflation can be silently creeping upwards. If inflation is only 1-2% per year, the average consumer won’t see much of a change in their monthly costs. This is especially true of people who don’t have a budget and don’t know how they are spending their dollars. But inflation is always present, gnawing away at the value of the dollar. As the dollar becomes less valuable, sellers want more of them to cover their growing costs and to at least maintain some semblance of profitability. Therefore, if you are a consumer, you also need more dollars to buy at least the necessities of daily living.
Inflation and Investing
Some types of investments also experience inflation. When the shares of a company’s stock are in limited supply, and everyone wants some of the shares, the price of the shares goes up. Therefore, I am usually looking to buy investments that have an inflation factor. There are three inflation factors I want to see.
Inflation Factor One – Smart Business Practices
I want to see inflation (also called growth) in the revenue and earnings of a company. In other words, I want them to charge more for their improved products and services to more than keep up with the inflation that is eroding the value of the dollars they collect. If they can improve their gross margin, that is even better! How can they do this? One way is to reduce labor costs. That is one reason you see more self-service checkouts in groceries stores. You are doing the work of a former employee, and this can save the grocer in their labor costs, medical benefits, and other employer-covered costs like Social Security matching.
Inflation Factor Two – Dividend Growth
Most of the stocks and ETF investments I buy and own pay increasing dividends. Of course, increasing dividends has an upper limit if the business is not earning more than the dividend they pay. This means that a company who is increasing their dividend an average of 8% of year can only do so if they have more profits to distribute.
Inflation Factor Three – Expanded Choices
One of the reasons many businesses prosper is that they don’t just sell Regular Coca-Cola. They sell Diet Coke, Cherry Coke, Coke Zero, Coke Vanilla, Coke Cherry Vanilla, Coke Cherry Zero Sugar, and Diet Coke. They sell it in big bottles, little bottles, 12-pack cans, and mini-cans. They sell it in restaurants and fast-food joints. That is one reason I always look at the business description to see if they have more than just Regular Coca-Cola. (See Note regarding Coke’s registered trademark.)
An Example is Seagate Technology Holdings
Seagate Technology Holdings plc has more than just “regular Coke.” STX provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company offers hard disk and solid-state drives, including serial advanced technology attachment, serial attached SCSI, and non-volatile memory express products; solid state hybrid drives; and storage subsystems. It also provides enterprise data solutions portfolio comprising storage subsystems and mass capacity optimized private cloud storage solutions for enterprises, cloud service providers, and scale-out storage servers and original equipment manufacturers (OEMs). In addition, the company offers external storage solutions under the Seagate Ultra Touch, One Touch, and Expansion product lines, as well as under the LaCie and Maxtor brands in capacities up to 16TB. It sells its products primarily to OEMs, distributors, and retailers. Seagate Technology Holdings plc was founded in 1978 and is based in Dublin, Ireland.
Note: Cola-Cola is the registered trademark of The Coca-Cola Company (KO)