In the last week, it’s started to get serious. The monthly price index in the UK, for example, reached 2.5%, the biggest rise in three years, as the economy began to unravel and companies began to raise prices. Amid labor shortages, wages are rising more than 7% a year, and while there may be some differential factors, it all conspires to remind us of the noxious price-wage spiral of the 1970s. At least some members of the Monetary Policy Committee have begun to keep the rise in prices under control. Meanwhile, in the United States inflation has reached an alarming 5.4%, the highest rate in thirteen years. There are many explanations for this, from supply bottlenecks, to the huge stimulus plans launched into economies by governments desperate to get out of the pandemic, to the change in consumer behavior after they are no longer locked in home. However, whatever the reason, it seems inevitable that there will be sustained price increases for some time.
However, inflation hits different companies differently. For example? Just take a look at some of the major sectors. Telecommunications and public services are among the most protected sectors. BT, for example, has already linked the prices of broadband, its main source of revenue, to the consumer price index. When it goes up, so will its prices, and since very few of us can already contemplate a life without broadband, there will be no choice but to pay. The same is true of most regulated utility companies, which have the flexibility to increase their rates as inflation rises. Next, let’s take a look at the oil giants. From a low of $16 last year, it’s back to over $70. Of course, this contributes to the general rise in inflation, but it’s also very good for Big Oil BP and Shell, two of the biggest energy companies in the world. world. Pharmaceutical giants GlaxoSmithKline and AstraZeneca may have had their own problems in recent years – GSK doesn’t have enough new drugs and, to put it mildly, it has proven controversial – but they do have a lot of pricing power. A 5% price increase does not affect the demand for medicines, especially if they are needed for serious illnesses. Consumer goods and beverage conglomerates such as Unilever or Diageo have room to raise prices at least in line with inflation. Banks are on tougher ground, but if monetary policy tightens and interest rates eventually rise, they should benefit. After all, near-zero rates have devastated their margins. All of these companies should get through a modest bout of inflation with few scars.
On the other hand, this does not help retailers. Private investors are surrounding supermarket chain Morrisons, hoping to grab its steady cash flow, and Sansbury’s and even Tesco may well be the next target. But they may well find themselves with food, staff and transport costs soon, while competition from companies like Aldi and Lidl make it impossible to raise prices. You don’t have to spend a lot of time on math to figure out that it’s not a good combination. The airlines? Even with the skyrocketing cost of oil, it is very difficult for IAG, which owns British Airways, or Easyjet, to charge more for tickets. Perhaps, above all, tech companies will struggle. The Internet is a brutally competitive market, where price competition is relentless. Uber won’t raise fees, or Deliveroo will charge extra for biking to get some sushi (the only exception may be Netflix, which has enough of its own programming to afford to raise fees).
The UK has many more companies of the first type than of the second. We have very few tech companies in the FTSE 100. We may consider ourselves a nation of traders, but we don’t have many retailers anymore, many of them have withdrawn. However, consumer staples make up almost 20% of the index, financials 18%, healthcare 10% and energy almost 9%. Technology represents less than 2%. Actually, not just the Nasdaq and S&P 500 over the past decade, but most major European indices as well. It is now only a fraction above the maximum it reached at the end of 1999, 21 years ago. The situation has been bad. However, with inflation advancing, that will start to change, and the UK market could finally do better than its rivals.
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