Before we answer this question, let’s know how exactly does inflation affect investing:
How does inflation hurt?
In an inflationary environment, input costs for product-based businesses rise. Therefore, businesses have to increase the selling prices of their products. The end consumer ends up paying a high price for the same product which used to cost less before. Else, the business can keep the prices same and reduce the quantity of the product. Here, the consumer pays the same price, but for less quantity of the same product.
If the prices remain inflated for a prolonged period, it starts affecting the purchasing power of the consumer. It affects the demand for the company’s products. Sales volumes of the companies reduce. The company’s future growth is also negatively affected in such an environment. This has negative effect on its stock price, thereby reducing the returns for its investors.
Is there any way to invest in such an environment? There is! Let’s look at it:
- Service based companies may not be affected by high inflation. Eg- Software companies.
- Some companies can increase the selling price and still retain demand. Such companies have a good pricing power.
- Some companies sell luxury products at very high prices. The demand for their products remains constant even if they increase the price of their products. That’s because their customers are not affected by inflation as much as the common man.
- Some companies come under the category of consumer essentials. Their products are essential in the day-to-day life of their customers. The demand for such products doesn’t go away.
An investor can look for such companies that provide these products/services. They can invest in these companies even in a high inflation environment. An investor should keep it in mind that this environment doesn’t last for life time. But the stock prices may decline during such an environment. An investor should use this opportunity and invest at low prices in companies with sustainably growing businesses.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”