Pricing-Power Inflation Test
Favor companies that can raise prices as their costs and currencies change
- Difficulty
- Easy
- Time to result
- ~weeks to results
- Steps
- 4
- Confidence
- 93%
This test reframes inflation as a company-selection problem rather than an automatic reason to avoid equities. The investor identifies whether a business can increase its selling prices as wages, materials, and other costs rise or as the local currency loses value. Pricing power may come from differentiation, scarcity, customer dependence, contracts, or a strong competitive position. The critical comparison is between the speed and durability of price increases and the movement in the company's cost base. A company that reprices successfully can preserve or expand nominal earnings, while one that cannot may suffer margin compression despite growing revenue. The rule therefore directs attention away from the headline inflation rate and toward the operating mechanism that transmits inflation into each company's profits.
Origin
Extracted from Masters in Business during Mark Mobius's discussion of inflation, equities, and his book The Inflation Myth.
Core principles
- 01Inflation affects companies differently
- 02Pricing power can protect real earnings
- 03Equities can adjust to inflation through company-level price changes
- 04Currency devaluation matters less when revenue adjusts alongside it
How to run it
- 1
Map inflation exposure
Identify which inputs, wages, currencies, and financing costs are rising. Estimate how quickly each pressure reaches the income statement.
Pro tip Distinguish temporary input spikes from recurring cost escalation.
Watch out Headline inflation may not reflect the company's actual cost basket.
- 2
Test the ability to reprice
Review historical price increases, customer retention, contracts, competition, and regulation. Determine whether prices can move without destroying demand.
Pro tip Look for repeated evidence of successful increases rather than management's assertion of pricing power.
Watch out Higher list prices do not help when discounts rise or sales volumes collapse.
- 3
Compare timing and magnitude
Compare the pace of realized price increases with the pace of cost inflation. Assess whether margins are maintained after accounting for volume changes.
Pro tip Track realized revenue per unit and gross margin together.
Watch out A timing lag can create serious cash-flow pressure even when repricing eventually succeeds.
- 4
Select or reject
Favor companies whose economics adjust at least as fast as their costs and avoid those with structurally fixed prices. Continue monitoring because pricing power can erode.
Pro tip Prefer pricing power grounded in customer value rather than temporary shortages.
Watch out Do not treat every equity as an inflation hedge.
In the wild
A branded supplier faces higher packaging and transport costs. It has raised prices several times without meaningful customer losses because retailers depend on the product's demand. The investor verifies that realized prices are rising faster than unit costs and that margins remain stable.
→ The company preserves earnings despite elevated inflation.
Common mistakes
Treating all equities alike
Inflation does not protect a shareholder when the underlying company cannot pass on costs. The operating model must be tested directly.
Confusing price increases with pricing power
True pricing power includes customer acceptance and preserved margins, not merely announcing a higher price.
Is it for you?
Best for
It is best for equity investors comparing businesses during periods of rising prices or currency devaluation.
Not ideal for
It is not ideal for businesses with regulated prices, commodity-like products, or no evidence of customer willingness to pay.
From the transcript
“the great thing about inflation is that if you're equity investor in other ways, an investor in companies that can adjust their pricing in line…”
“That's great provided and this is the big proviso you're in companies that have pricing power.”
From the episode
Mark Mobius on Emerging Market Funds
Mark Mobius