September 1, 2022

The Inflation Game

By Scott Wohlers

“You raise prices, I will match you and raise you.” And so, it goes. Businesses have learned how to play the game. Some companies producing products and services find it easier to hike prices when so many others are too. Why not add a little extra in case costs keep going up. There is also the opportunity to add to profit margins.

There are many ways to raise prices. Besides just being direct and honest about it, strip out a bundled price into its separate components with the new total cost being more than the original. Reduce size or quality. Add surcharges. And there are more.

Some companies have discovered that selling less but at higher prices produces more profits. Mercedes sold fewer cars last year but made record earnings. They focused on their most profitable models. Disney has increased admission prices to their theme parks, thereby reducing crowds but making more money than ever. The general effect is that that the economy becomes even more a case of haves and have nots. This has implications for investors.

Second quarter profit margins were at a new record high. The Bull wrote in a previous blog that inflation can be good for business. That is what is happening. Yes, the higher interest rates that come along with inflation detracts from stock values, but higher earning add to them. How it all works out remains to be seen, but it is not all bad. If inflation continues to come down and profits remain high, look out above! Positive money flows also point to better days coming. Stay steady my friends.

El Solo Toro