We haven’t talked too much about inflation here and have recently noticed concerns about inflation have been somewhat mitigated in the press and blogosphere. We get especially nervous about something when everyone else thinks it’s not worth worrying about. Inflation is a measure of a general rise in prices of goods and services over time. The more money available in the market, the more goods and services are generally worth. Two years ago, with the amount of government stimulus money being spent, inflation seemed to be the number one concern. However, governments were printing money at the same time investors were moving cash to the sidelines. The cash has remained out of the system. We have yet to see significant inflationary pressure, and inflation appears to have moved towards the bottom of investors’ lists of concerns. Factors such as unemployment and uncertainty have kept cash from moving into the market; however we believe some circumstances are still ripe for inflation (low interest rates, high government spending, and rising production costs).
So what do we do to mitigate this risk? High quality companies with decent pricing power and sustainable competitive advantages are able to pass along cost increases to customers and therefore their earnings can keep up with inflation. We believe a portfolio of common stocks will offer investors the best opportunity to make money irrespective of inflation. Maintaining diversification and a long term perspective should serve our clients well.