Inflation can be a persistent and pervasive problem. It tends to erode the value of hard-earned cash by steadily reducing its purchasing power. To maintain that all-important spending power, ASX investors need to find stocks that will provide returns that exceed the rate of inflation. An expert considers Wesfarmers Ltd (ASX: WES) to be one such company.
One Australian fund manager has shared a characteristic that makes companies potentially more capable of defending against corrosive inflation.
Defeating the effects of inflation
Inflation is when prices for goods and services increase over time. This means that it costs more to buy groceries or fill up your fuel tank than it did before.
However, consumers are often not alone in their inflation woes. Companies can also feel the pinch of rising costs due to inflation, whether this is in the form of increased material costs or labour expenses.
Portfolio Manager and Head of Research at Airlie Funds Emma Fisher shared her insights on combating inflammatory inflation. In an interview, Fisher highlighted pricing power as an important trait of companies able to ward off the impact of inflation.
Ultimately when we look across the portfolio, I think the key thing to worry about is that the businesses that you're invested in have pricing power. Inflation is going up in the near term. The unanimous feedback from corporates is that they are seeing raw material and increasingly labour market inflation coming through. Their hope is that they are going to be able to pass that through to the end consumer in the form of higher prices.
In addition to this, Fisher suggested examples of these inflation-fighting shares include Wesfarmers, James Hardie Industries PLC (ASX: JHX), Woolworths Group Ltd (ASX: WOW), and Reece Ltd (ASX: REH).
Back in May, Wesfarmers CEO Rob Scott confessed that the whole market is facing cost pressures. However, the leader of the $72 billion business suggested they weren't simply looking at increasing prices to offset inflationary costs. Instead, the company is attempting to use its scale to negotiate lower costs with its suppliers.
Wesfarmers' plan is to capture a greater market share while other companies pass on increased costs to customers.
When will Wesfarmers report to the ASX?
Being one of the largest companies on the ASX, the Wesfarmers FY21 annual report is highly anticipated. The diversified business conglomerate expects to release its annual results on Friday 27 August.
Shareholders of Wesfarmers are also likely on the lookout for a renewed bid for Australian Pharmaceutical Industries Ltd (ASX: API). This follows the company's initial $1.38 per share bid for the pharmacy chain operator which was rejected.
