Importing inflation

We have spoken previously about currencies and how a depreciating currency can be a benefit in many ways, not least making exports more competitive. However, one of the bi-products can be 'importing inflation'. 

Think about the price of petrol at your local garage, I bet it has become more expensive over recent weeks?! This is not due to a spike in the oil price, simply it's down to Sterling weakening against the USD and therefore making oil (priced in USD) more expensive. This will be occurring with many other imports, not just oil. 

It is often the case that with this type of inflation consumers do not fully feel the effects for a year or so, as prices do not change instantaneously, and so it could be that the real pinch of inflation occurs in 2014. CPI (consumer price index) last peaked in September 2011 at 5.4%. Given the poor state of the recovery it didn't lead to wage inflation. High levels of wage inflation can be very bad for businesses as costs (wages) spiral out of control. At this point in time I still don't feel employees have enough bargaining power to demand large wage increases should high levels of inflation occur, but it could be one to watch. Businesses with pricing power, which have the ability to pass costs onto consumers are normally desirable in this situation as they can maintain margins.

Having a strategy to implement in your portfolios to hedge against inflation could be something worth considering....