Summary

• Persistent inflation may delay interest rate cuts, creating a challenging economic environment.
• Companies with strong pricing power can pass rising costs to consumers, protecting their profits.
• Key sectors include consumer staples like PepsiCo and industrial firms like Ingredion.
• Investing in businesses with durable competitive advantages is crucial during high inflation.

The Inflation Hangover and the Companies Still Standing

It seems inflation is the houseguest who has long overstayed their welcome. You know the type. They drink your best wine, use all the hot water, and despite repeated, increasingly unsubtle hints, simply refuse to leave. For months, central bankers, particularly those at the US Federal Reserve, assured us this guest was packing their bags. Any day now, they said. Well, the latest data suggests the bags are not only unpacked, but the guest has started redecorating the spare room.

To me, this wasn't a great surprise. The idea that we could pump trillions into the global economy and not face a prolonged inflationary hangover always seemed a bit, shall we say, optimistic. The recent Personal Consumption Expenditures index, the Fed’s favourite bedtime reading, confirmed as much. It came in hotter than anyone in an official capacity was willing to admit was possible. This stickiness means the dream of imminent interest rate cuts is likely to remain just that, a dream.

The Unfashionable Virtue of Pricing Power

In this sort of environment, most companies find themselves in a rather tight spot. Their own costs are rising, from energy to raw materials, whilst their customers are feeling the pinch. It’s a classic pincer movement on profit margins. But a select few businesses possess a superpower, an old-fashioned virtue that has become incredibly valuable again. It’s called pricing power.

What is it, exactly? It’s the ability to raise your prices without your customers fleeing in droves. It’s the difference between a brand people want and a commodity they’ll buy from anyone who is a penny cheaper. Think of it like your favourite local pub. The price of a pint might creep up, and you’ll have a good moan about it, but are you really going to stop going? Probably not. That, in essence, is pricing power. It’s built on brand loyalty, essential products, or a dominant position in the market.

The Usual Suspects and a Few Surprises

Some of the companies that excel here are household names. Take PepsiCo, for instance. The company is a master of this game. When the cost of corn, sugar, or potatoes goes up, they can nudge up the price of Pepsi, Lay’s crisps, and Quaker Oats. Why? Because these are small, affordable treats. A 10p increase on a bag of Doritos might be irritating, but it’s unlikely to be a dealbreaker for most people looking for a snack. It’s a simple, repeatable trick that protects their profits beautifully.

Then you have slightly less obvious players, like PriceSmart. They run membership warehouse clubs, mostly in Latin America and the Caribbean. Their model is fascinating because inflation can actually strengthen their appeal. As household budgets get squeezed, the idea of buying in bulk to save money becomes more attractive, not less. Customers pay a membership fee for the privilege, creating a loyal base and a steady, predictable revenue stream for the company.

And let’s not forget the companies you’ve never heard of, like Ingredion. They make the specialised starches and sweeteners that go into countless food products. They are a crucial, if invisible, part of the supply chain. When their raw material costs rise, they simply pass those increases on to the big food manufacturers they supply. They aren't absorbing the pain, they are merely acting as a conduit for it. Finding these inflation-resistant gems isn't about chasing fads, it's about understanding fundamental strengths. It’s a specific skill set, really, a bit like Navigating Persistent Inflation in a storm. For investors, identifying these characteristics could be key in the current climate.

Deep Dive

Market & Opportunity

• Recent economic data shows inflation is more persistent than policymakers expected, particularly in the Personal Consumption Expenditures (PCE) price index.
• The Federal Reserve is likely to keep interest rates higher for longer, creating challenges for businesses with rising input costs and expensive borrowing.
• The primary investment opportunity in this environment involves companies with "pricing power", which is the ability to pass increased costs to consumers without losing significant sales.
• According to Nemo research, the economic climate may be shifting to favour companies with operational efficiency and strong pricing power over high-growth businesses.

Key Companies

• Pepsico, Inc. (PEP): A beverage and snack company with strong brand loyalty for products like Pepsi and Lay's crisps. It can raise prices during inflationary periods without a major drop in consumer demand.
• Pricesmart Inc (PSMT): Operates membership warehouse clubs in Latin America and the Caribbean. Its business model provides recurring revenue from membership fees, and its value increases for consumers seeking to buy in bulk during inflationary times.
• Ingredion Incorporated (INGR): An ingredient solutions provider for the food industry. The company uses a pass-through pricing model, allowing it to adjust prices in line with rising raw material costs to protect its profit margins.

Primary Risk Factors

• Persistent inflation and higher interest rates create a difficult operating environment for many companies, especially those reliant on cheap financing for growth.
• Rising input and borrowing costs can reduce company profits and make business expansion more difficult.
• All investments carry risk and you may lose money.

Growth Catalysts

• Companies with strong brands, essential products, and dominant market positions may be able to protect or grow their profits during inflationary periods.
• Businesses that can effectively manage costs and pass price increases to customers are positioned to outperform.
• Nemo's analysis suggests that defensive stocks with strong cash flows can become valuable portfolio assets when economic uncertainty is high.