A Real World Lesson on the Effects of Inflation

Good afternoon,

I came across an article in the Wall Street Journal on 10/27/21 that caught my attention, so I thought I’d share some of its findings and my thoughts with you. The title is “McDonald’s Raises Menu Prices as U.S. Worker Wages Climb” and it is a great demonstration on the real-world effects inflation has on everyday people like you and me.

Lately, one of the biggest headlines across all forms of media has been the debate surrounding inflation and the long-term effects it will have on the U.S. consumer. The final wake up call for me that the recent uptick in inflation may not be transitory but instead here to stay was the recent announcement from the Social Security Administration stating:

“Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2020 through the third quarter of 2021, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 5.9 percent COLA for 2022.”*

This means that those of you who are currently collecting Social Security benefits just got a 5.9% raise! Pretty nice. It also means that even the government is betting that the cost of the goods you purchase everyday are going up. So, let’s take a look at some facts pointed out in the WSJ article:

“McDonald’s Corp. is raising menu prices to keep pace with rapidly growing costs, the company said, with wages alone up at least 10% so far this year at U.S. restaurants.”

“The Big Mac maker is also paying more for paper, food and other supplies, executives said. McDonald’s expects its commodity costs for the year to rise by 3.5% to 4%, up from the 2% they grew earlier in 2021, executives said.”

“Those higher costs are making their way to consumers, as McDonald’s executives said they expect U.S. prices to be up about 6% this year compared with last year.”

Importantly, rising costs are not unique to McDonald’s….

“Companies across the globe are raising consumer prices in response to growing costs spanning distribution and freight to fuel and food.”

“Many restaurants are raising menu prices to offset higher wages for cooks and servers and rising costs for meat, packaging, vegetable oil and other commodities.”

What is any rational company going to do when the price of their inputs goes up? Well, they can try to lower their input costs through innovation, technological advances, automation or joining forces to take advantage of economies of scale and better efficiencies. And as this article points out, they can also pass on some of the burden to you and me in the form of higher prices for their goods and services. So, even without selling any more units of their products, efficient companies can have higher sales and earnings which will drive up their earnings. This in-turn will create value for the companies which over time will be reflected in higher stock prices.

The great companies of America and the world will evaluate the current economic environment and respond accordingly, just like they have always done. The awesome thing for us is that we can participate in this process simply by the virtue of being stockholders in their companies. Over the long-term, the best strategy to overcome inflation has been to be an owner of well-run companies, not a lender to them.

I hope you’ve found this article informative and thought provoking. As always it is a pleasure and an honor to serve you. If you would like to discuss any of this information further, please reach out to us. Have a great day and talk with you soon!

Cheers,

David Henderson

*https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf