KKR Predicts US CPI Inflation to be 5% in 2022 and Is Optimistic on Businesses with Pricing Power

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The private equity firm of Barbarians at the gate fame anticipates the inflation to persist in 2022 and advises to bet on Price Makers.

What is Pricing Power and why its importance has increased?

Pricing power is the ability of the companies to pass on the increase in the cost of producing goods or services to the consumers. Supply chain and labor shortages are putting pressure on the input costs of the companies and margins are coming under pressure. Producer price inflation has been increasing at a rapid pace than consumer price inflation as depicted in the below chart.

Source: KKR Report-A Different Kind of Recovery

Labor shortages and wage pressures are also adding to the woes of the companies as shown in the below charts

Source: KKR Report-A Different Kind of Recovery
Source: KKR Report-A Different Kind of Recovery

Do not own Price Takers

A price taker is a company that is unable to pass the rising input costs to the consumers. KKR warns against owning price takers. The firm has given some hints of the companies considered as price takers. These companies are
1. Companies with high leverage levels and the inability to pass on the increased costs to the consumers
2. Consumer products companies with unhedged input costs
3. Companies with a larger share of the lower-wage workforce and limited pricing power such as second-tier retailers and certain healthcare companies.

Buy Price Makers

Price makers are the firms that can easily pass on the increased costs of inputs to the consumers due to their brand loyalty or market position. Though the firm has emphasized buying price makers, it has not specified the sectors or companies meeting the definition of price makers. AllianceBernstein (Global Asset Manager) has provided a few names of the businesses with pricing power.

Among them are payments processing giants Visa and MasterCard, which together account for 75% of all debit/credit card transactions worldwide. Both companies have delayed price increases through Pandemic but intend to do so in 2022, which makes them a good buy in the pricing power theme.

Microsoft is another pick as the subscription price of its flagship product Microsoft office has remained static since 2014 but the company has recently announced that prices will increase in March 2022. Nestle is also confident of passing higher food commodity prices to consumers globally over the next two years, which should be of no surprise as the company enjoys worldwide brand loyalty.