Prices of everyday items have skyrocketed, and consumers wallets are feeling the pinch.
There’s nothing more saddening than pulling into your local servo before your Sunday afternoon cruise and getting smacked by the $2.25 per litre gas price! Sorry mum, I won’t be coming over tonight for your famous BBQ…
Just as inflation squeezes household budgets, most companies feel the same way.
Inflation hurts companies in two ways:
- Cost effect – higher product costs cannot always be passed onto consumers. If this is the case, company margins get squeezed.
- Demand effect – households income gets dwindled down as the cost of everyday items increase. If the product or service that the company offers is a want, you’re in a tough spot during an inflationary environment as the demand for your product or service is likely going to fall.
A great way to hedge inflation is to own assets that increase at or above the inflation rate.
APA Group owns and operates gas pipelines throughout Australia with 80-90% of its revenue being linked to the Consumer Price Index (fancy word for inflation). This means that as inflation increases so does APA’s revenue, making it a beneficiary of rising inflation.
The graph below highlights the positive relationship between APA’s share price and the yield of the Australian 10-year government bond, which acts a benchmark for future inflation expectations.
Owning APA could be the reason that you get to go on your Sunday afternoon cruise!