Inflation, It's Not Just for Balloons

Inflation is having a moment. After years of low and stable prices, the word is everywhere — in the news, in earnings calls, in conversations between business owners who haven't had to think about it in a generation.

Most of the coverage focuses on the macroeconomic level: CPI, Fed policy, interest rate expectations. That matters. But for business owners and investors, the more pressing questions are operational: what does inflation actually do to my business, and what should I be doing about it?

Inflation is not uniform

The aggregate number — CPI, PCE, whatever headline you prefer — is a weighted average of a lot of different prices moving in a lot of different directions. Labor, fuel, raw materials, and finished goods don't all move together. What inflation means for a service business with high labor costs is different from what it means for a manufacturer with long-term supply contracts.

Pricing power is the variable that matters

Businesses with pricing power — the ability to raise prices without losing significant volume — can largely offset inflationary pressure by passing costs through to customers. Businesses without it absorb margin compression.

This is Warren Buffett's most-discussed criterion for a great business, and for good reason. In an inflationary environment, the gap between businesses with and without pricing power widens dramatically.

Inflation and investment returns

For investors, inflation erodes the real value of fixed returns. A 6% yield on a bond is a much better investment with 2% inflation than with 6%. This shifts the calculus toward assets with returns that can grow over time — businesses, real estate, commodities — and away from fixed income.

What to do

For business owners: review your contracts for price adjustment mechanisms, assess your ability to raise prices, and focus on operational efficiency to protect margins.

For investors: evaluate the inflation sensitivity of your portfolio, prioritize businesses with durable pricing power, and be cautious of investments whose returns are fixed in nominal terms.

Inflation is uncomfortable. It is also clarifying. It strips away the businesses that were running on low costs and easy money, and rewards the ones that were built to last.