Nominal and real
Inflation means prices across the economy are rising in general, so a pound buys less than before. Any figure in pounds in a company report, such as sales or profit, is a "nominal" figure. To know whether the business really grew, compare its growth with inflation over the same period. That comparison is "real" growth.
Who copes with inflation better?
Inflation hits a company from two sides: its costs rise, such as materials, wages and shipping, while it tries to raise its own prices. The outcome depends on one question: can the company raise prices as fast as its costs rise without losing customers? That ability is called pricing power.
No sector wins or loses from inflation as a whole. Pricing power differs from company to company, depending on competition, on whether the product is essential or easy to give up, and on whether some prices are set by others.
Reading figures in inflationary times
Compare sales and profit growth with inflation, not with zero. Watch the profit margin year to year: a shrinking margin can be a sign that costs are outrunning prices, though it can have other causes too, so look for the reason in the company report. The central bank uses interest rates to try to cool inflation, so the two stories are usually read together.
Look at company figures
Open any company's results and compare its sales growth with inflation over the same period.
Check yourself
1. A company's sales grew 10% while prices rose 15% that year. What is its real growth, roughly?
2. What helps a company cope with inflation better than others?
Summary
- Inflation inflates nominal figures, so compare a company's growth with inflation, not with zero.
- The ability to raise prices along with costs protects the profit margin.
- No sector wins from inflation as a whole; the effect differs by company.