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Inflation

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scrumpyjack
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Re: Inflation

#429328

Postby scrumpyjack » July 21st, 2021, 2:54 pm

1nvest wrote:
GoSeigen wrote:
GrahamPlatt wrote:What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.


Is this even true? How do you know?

GS

If the nominal price remains unchanged then the price declines in real terms with rising/higher inflation :)


Inflation will affect companies very differently depending on the nature of their business. A manufacturing business will be very hard hit because their input costs will rise whilst profit will be measured based on the historic cost of their materials etc rather than replacement cost. This results in them needing ever more capital and to being taxed on unreal profits. This was the reason for oil companies many decades ago changing to a replacement cost accounting basis, and the Labour government in the ‘70s, having overseen a drastic rise in UK inflation (27% at one point) had to introduce special measures to stop much of British industry going bust.
But businesses, eg services, that do not need much working capital, can carry on pretty unaffected.

odysseus2000
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Re: Inflation

#429362

Postby odysseus2000 » July 21st, 2021, 3:55 pm

scrumpyjack
Inflation will affect companies very differently depending on the nature of their business. A manufacturing business will be very hard hit because their input costs will rise whilst profit will be measured based on the historic cost of their materials etc rather than replacement cost. This results in them needing ever more capital and to being taxed on unreal profits. This was the reason for oil companies many decades ago changing to a replacement cost accounting basis, and the Labour government in the ‘70s, having overseen a drastic rise in UK inflation (27% at one point) had to introduce special measures to stop much of British industry going bust.
But businesses, eg services, that do not need much working capital, can carry on pretty unaffected.


Yes, but things have changed.

Manufacturers no longer keep a lot of stock, mostly operating on just in time ordering.

Secondly and more importantly the UK economy is predominantly services (80% https://commonslibrary.parliament.uk/re ... s/sn02786/)

As you note these business are less troubled by inflation.

Consequently the old inflation experience may no longer be a guide to what might happen going forwards.

Regards,


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