Greedflation: Can Consumers Hedge Rising Costs of Living by Investing in These Companies?

Singapore’s Consumer Price Index (CPI) is expected to range between 5.5% to 6.5% for 2023.

Even though some of us are feeling the pinch of higher prices, the situation here is mild compared to other parts of the world.

For instance, many emerging markets around the globe average a higher inflation rate of above 8%.

The International Monetary Fund mentioned that food and energy are the culprits driving price hikes, and the lag time for rising costs to be passed on to customers results in persistent core inflation.

However, there may be another underlying, arguably more insidious factor behind rising prices.

This reason is termed “greedflation”.

Higher profit margins despite elevated costs

Greedflation suggests that corporations delivering goods and services capitalise on the inflationary climate to jack up prices more than their input costs.

Another way for consumer goods companies to pass on the price to consumers is through “shrinkflation” – reducing portion sizes while holding prices steady.

The outcome of greedflation is higher profit margins for businesses despite rising expenses such as raw materials, rent, and labour.

Typically, larger firms with more market clout face less competition.

This confers greater pricing power, which makes them more likely culprits for this practice.

Soaring input costs due to COVID-19 supply chain disruptions should have squeezed corporate margins or at least held them steady.

Instead, the profits of many corporations have surged during the pandemic.

For example, General Motors (NYSE: GM) raised its 2023 earnings guidance and a closer inspection revealed that the firm’s pricing actions contributed healthily to its earnings.

Even though greedflation seems more prominent and widely reported in other countries, being aware of this concept is still important for Singapore consumers because our economy relies heavily on imports for intermediate and final goods.

An area of particular concern to consumers is the prices of fast-moving consumer goods.

YouGov’s brand rankings listed Maggi and Oreo as some of the top food brands among Singaporeans.

These two brands are manufactured by Swiss and American food conglomerates Nestlé (SIX: NESN) and Mondelez International (NASDAQ: MDLZ), respectively.

The former raised prices yet again in the first quarter of 2023 and ended up beating analysts’ consensus estimates.

The latter expects annual profits to grow by over a tenth, an upward revision over its previous guidance of high-single digit growth.

Moving on from the food to the personal care category, Dove and Lifebuoy by Unilever (LSE: ULVR) are also popular toiletry brands used by consumers.

Unlike the previous two companies, Unilever claims that its operating margins have been depressed from 18.4% in 2021 to 16.1% in 2022.

Nevertheless, the company’s reluctance to disclose its latest quarterly profitability may warrant some speculation about its part to play in greedflation.

What are governments doing about it?

From a regulatory perspective, the picture seems bleak as governments have mounted limited responses to keep price gouging practices in check.

For example, the US Federal Reserve stated that it “cannot force corporations to change their ways”.

Elsewhere in Europe, the Bank of England took a muted approach by urging companies to refrain from opportunistic profiteering.

The US Federal Reserve has admitted that it cannot force organisations to change their corporate practices but can push for change nonetheless.

Greedflation is also carefully watched by Singaporean authorities, particularly the Committee Against Profiteering (CAP) which polices against groundless price hikes using increases in goods and services tax as an excuse.

On a brighter note, MAS advised that Singapore’s imported inflation is currently in  negative territory and is subject to further declines.

Nonetheless, it warned that the risks of unforeseen supply shocks can send commodity prices spiralling upwards.

Thankfully, local investors may be able to hedge some of these risks investing their money in suitable stocks.

Be both an investor and consumer 

A highly relevant sector for investors to look at is consumer staples.

Many companies alleged to be engaged in greedflation (such as those listed above) are found here.

Not surprisingly, consumer staples have performed well.

In fact, for the month of April, the consumer staples sector outshone every other sector to deliver the highest monthly return at 3.65%.

Besides capital gains, there are also dividend powerhouses such as PepsiCo (NASDAQ: PEP) with high dividend payout ratios above 60%.

Given the sector’s consistent steep increases in earnings per share, a high dividend payout ratio should give investors comfort.

Other well-known consumer names such as Colgate-Palmolive Company (NYSE: CL) have hiked their yearly dividends for several decades, suggesting that they are dependable income streams to help hedge against the rising cost of living.

On top of delivering decent returns, consumer staples businesses are also less risky as they supply necessities that people purchase on a regular basis.

Due to how wide the consumer staples sector is, investors can opt to buy exchange traded funds (ETFs) with holdings across multiple sub-sectors such as food retail, distribution, and household products.

One such ETF that is trading at a discount to its net asset value is the Fidelity MSCI Consumer Staples Index ETF (NYSE: FSTA).

The ETF also has one of the lowest expense ratios at 0.08%.

Faced with rising costs of living, it is helpful for Singaporeans to look for additional ways to make their money work harder for them.

To guard against greedflation, buying not just these companies’ products but also their shares can be a savvy way of achieving this.

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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.

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