Pricing power: a response to the risk of a return of inflation

After long months of procrastination and very strong uncertainties in the context of the Covid-19 pandemic, investors and business leaders are now finally seeing the end of the tunnel. The end of the containment measures allows economic activity to fully regain its rights. At the same time, the acceleration of vaccination at the global level, combined with the economic stimulus measures implemented by the main governments around the world, are making a significant contribution to supporting the resumption of global economic growth. A recovery which tends to be confirmed week after week.

However, this strong economic recovery is now fueling growing fear of a return to inflation. After years marked by low inflation during the 2010s, in particular in the euro zone, the time seems to have turned around. Unsurprisingly, in the minds of a large number of investors, the issue of inflation has therefore once again become a central issue. And for good reason ! In the United States, consumer prices (excluding energy and food) have indeed resumed their upward trend following the total reopening of the American economy. In Europe too, we are witnessing a similar movement, even if it remains more modest for the time being. However, with the reopening of so-called “non-essential” businesses and the relaxation of curfew measures, consumption is on the rise again on the Old Continent.

Even if it is clearly premature to speak of a return of inflation, this news is however consistent with the acceleration of the post-Covd-19 economic recovery. A new situation which will not be without consequences for companies since it could create a gap between companies which will manage to increase their margins and those, on the contrary, which due to the increase in costs and strong competition , will not be able to. As such, this is excellent news for all companies with pricing power, this approach constituting an undeniable force in resisting exogenous shocks such as inflation.

Because all companies are not equal in the face of a possible return of inflation. We have seen this with the recent rise in raw materials, which began in the fall of 2020 and continued in early 2021. This situation inevitably generates significant cost increases for companies which are naturally tempted to want to pass these increases on to their prices and, therefore, to end consumers. Certain industries, like the textile sector or mass distribution for example, ultimately have little room for maneuver to adjust their prices upwards, on pain of losing sales. In a world marked by the explosion of e-commerce and the development of the culture of “good business”, they no longer have a favorable balance of power vis-à-vis their customers. They lost their hand …

Finally, only companies that have discriminating know-how (Logitech, Carl Zeiss Meditec or De’Longhi), a decisive competitive advantage (ASML, Eurofins, Infineon or Varta), an essential brand (Ferrari, Amplifon or Dr. Martens) or any other barrier to entry insurmountable for competition will have this power in the coming period.. All these companies benefit from greater latitude to adjust their prices upwards. due to the particularly strong attachment of consumers to their products and services.

In a period of deflation, stocks with pricing power manage to protect themselves from pricing pressures from their clients. From now on, they will also be able to break free from the economic cycle and reveal their capacity to adapt to the changes of our time. In an increasingly complex world, winning companies are those that choose their environment rather than suffer it. The share of research & development in their turnover, the proportion of engineers in their payroll and the ability to equip themselves with independent growth engines are all means for these groups to achieve this objective. A possible return of inflation could therefore prove to be favorable to companies with pricing power.