Summary

• Explore Pricing Power In An Inflationary Era investment opportunities as core inflation rises.
• Companies with strong brands or essential services can protect profit margins.
• Investing in firms with pricing power offers a defensive strategy against inflation.
• Key sectors include specialised manufacturing, utilities, and strong consumer brands.

Why Some Companies Can Afford to Ignore Inflation

I don’t know about you, but my weekly shop feels less like a chore and more like a financial assault course these days. The price of everything, from a pint of milk to a pint of bitter, seems to be creeping up with unnerving persistence. We’re all feeling the pinch. And if we are, you can be certain that the businesses we buy from are feeling it too.

The thing is, not all companies are created equal in the face of rising costs. For every business getting squeezed into oblivion, there’s another that seems to simply shrug, nudge its prices up, and carry on as if nothing has happened. It’s a fascinating, and for an investor, a crucial divide.

The Great Squeeze and the Unflappable Few

Let’s be blunt. When costs for raw materials, shipping, and labour go up, a business has two choices. It can absorb the hit and watch its profits wither, or it can pass the cost on to its customers. Most companies, frankly, are terrified of the second option. They operate in crowded markets where customers will bolt to a cheaper rival at the first sign of a price hike. These are the businesses currently having a very bad time.

Then you have the unflappable few. These companies possess a quality that is, in my opinion, one of the most valuable assets in today’s economic climate. It’s called pricing power. It’s the commercial equivalent of holding all the aces. It is the ability to raise your prices without sending your customers fleeing for the hills. When their costs go up, they simply adjust the price tag. It’s a beautifully simple mechanism for protecting their bottom line.

What's the Secret Sauce?

This power doesn’t appear by magic. It’s earned through a few key advantages. Think about your electricity provider. When they announce a price rise, what do you do? You might grumble, but you’re not about to start lighting your house with candles. Essential services are the classic example. You need what they sell, so you pay what they ask.

Strong brands are another source of this power. Why do people pay a premium for a particular brand of coffee or trainers when a cheaper version is right next to it on the shelf? It’s about trust, perceived quality, and loyalty. That loyalty acts as a formidable shield against inflation.

Finally, there are the market leaders. Companies that dominate their niche often face so little competition that customers have nowhere else to go. This gives them enormous freedom to set their own terms. To me, this is the essence of smart, defensive investing in times like these. It's about finding businesses that can hold their ground, a strategy you might explore in a basket like the Pricing Power In An Inflationary Era.

But Don't Get Carried Away

Of course, there’s no such thing as a free lunch in investing. Pricing power is a magnificent tool, but it isn’t invincible. A severe economic downturn could make even the most loyal customers think twice about paying a premium. New, disruptive competitors can always emerge from the woodwork to challenge a market leader. And let’s not forget the regulators, who can take a dim view of companies they feel are exploiting their position, particularly in essential sectors like utilities.

Investing in these companies isn’t a risk-free bet, because no such thing exists. It’s a calculated decision based on the idea that, in a world of rising costs, the ability to dictate your own prices is a powerful advantage. It suggests a business is robust, valued by its customers, and well-managed. And in the current climate, I think that’s a rather comforting thought.

Deep Dive

Market & Opportunity

• Core inflation has risen to 3.1 percent, indicating persistent underlying price pressures even as headline inflation remains steady.
• New tariffs are a key factor driving up costs for businesses across multiple sectors.
• The current economic environment creates an opportunity for companies with pricing power, which is the ability to raise prices to offset costs without losing customers.
• According to Nemo research, these companies can protect their profit margins during inflationary periods.
• This investment theme is accessible through the ADGM-regulated Nemo platform, which offers fractional shares starting from £1.

Key Companies

• Pricesmart Inc (PSMT): Operates membership warehouse clubs in Central America and the Caribbean. Its business model creates customer loyalty and pricing flexibility through membership fees and bulk purchasing.
• Cimpress N.V. (CMPR): Specialises in mass customisation of printed materials for small businesses. Its technology platform and customer relationships provide defensive characteristics, as clients often prioritise reliability over price.
• Powell Industries Inc (POWL): Manufactures specialised electrical power system equipment for utilities and industrial customers. The critical nature of its products provides significant pricing advantages.

Primary Risk Factors

• A severe economic downturn could reduce customer willingness to pay premium prices, even for essential goods and services.
• New competitors may emerge, challenging the market position of established companies and reducing their pricing power.
• Regulatory changes, especially for utilities, could limit a company's freedom to increase prices.
• During periods of economic optimism, market sentiment may favour growth stocks over defensive ones, potentially limiting share price appreciation.

Growth Catalysts

• The ability to pass on rising costs from inflation and tariffs directly protects company profitability and margins.
• Companies providing essential services, such as utilities, benefit from consistent customer demand.
• Strong brand loyalty and trust act as a protective barrier, allowing companies to maintain premium pricing.
• A dominant market-leading position with limited competition gives a company greater control over setting prices.

All investments carry risk and you may lose money.