A select group of our Club holdings have recently demonstrated durable pricing power to protect profits during what continues to be a high inflation environment. Pricing power is a company’s ability to raise prices on products and services without impacting demand. That’s not an easy task. For companies, elevated inflation means higher input costs — higher costs on the goods and services required to run their businesses. In turn, they want to raise prices and put that burden on their consumers and clients. However, such moves have to be done delicately because consumers and clients are also feeling the pinch of inflation and don’t want to pay more. The rate of inflation has, indeed, cooled over the past year in the U.S. from multidecade highs, but it remains well above historical averages. The Federal Reserve has tightened monetary policy through aggressive interest rate hikes to bring inflation closer to its 2% target. The Fed is walking a tightrope — looking to crush inflation while trying to make sure the economy doesn’t dip into a recession. In a recent note, UBS acknowledged, “Inflation may trend back toward the Fed’s target sooner than expected reducing the relative advantage of companies with pricing power.” However, the analysts pointed out that prices for now do remain elevated, making companies with pricing power “relatively better-positioned to maintain the price hikes implemented in prior quarters.” In fact, UBS believes that “companies with pricing power have the potential to outperform the broader market in the months ahead.” We’ve spoken to this dynamic before, noting that while inflation may be coming down — and with it input costs — the price hikes previously passed through are more likely to sustain. Typically, the more valuable or essential a product is, the more leverage a company has to increase prices. Pricing power can help boost revenue and lead to higher profit margins. However, it needs to be executed effectively so customers…
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