Consumer prices for everything from car rentals to airline fares are moving higher. The consumer price index, which includes the previously mentioned products and services, shot up by 4.2% in April 2021, from the same time last year. When prices for goods and services increase, it erodes the purchasing power of individuals. For example, if today with $100 you could get gas and groceries for a week, inflation could cause you to pay $110 for the same basket of goods a year from now.
Moreover, inflation could potentially reduce profits for businesses -- especially those that do not have the pricing power to raise prices on products and services when input prices go up. That's why if you are worried about inflation getting out of control, you should consider buying Coca-Cola (NYSE:KO) and Walt Disney (NYSE:DIS) stock. The two have the ability to increase prices on their products and services if inflation causes input prices to go up.
Disney stock can help protect your money from inflation
Disney is a prime example of a company with pricing power. A 2018 Wall Street Journal report noted that even though Disney has raised prices at double the rate of inflation in the last five years, Disney felt it could charge more than that without driving away too many customers. Anyone who has visited a Disney theme park will tell you it usually bursts at the seams, with hours-long wait times for attractions the norm rather than the exception.
The coronavirus pandemic and ensuing capacity restrictions are changing that in the short term. Still, as soon as those restrictions lift, it's likely to return to previous attendance levels, if not more, due to pent-up demand. Therefore, if inflation continues upward, Disney can continue raising prices without losing too many visitors.
What's more, Disney has the additional benefit that if price increases cause reduced attendance, those in attendance will have a much better experience and may be willing to pay even more. The No. 1 complaint from visitors to Disney parks is the long wait times for attractions. Before the pandemic, I had purchased annual passes for myself and my family to Disneyland for several years. We visited the parks dozens of times. Still, there are attractions that we haven't experienced because the wait time was always longer than two hours.
I will gladly pay 20% extra if the park has 20% fewer people. And, likely, we are not the only family that would be willing to pay more for a better experience.
If you're worried about inflation, Disney stock is a great way to protect your purchasing power in the long run.
People have come to love Coca-Cola's beverages over many decades. The long-standing history of habitually searching out and buying its products will be difficult to break. It's unlikely that if Coca-Cola raises the prices of its drinks by 5%, that many folks would be turned away.
Moreover, Coca-Cola benefits from being the exclusive beverage provider in many away-from-home channels like restaurants, theme parks (you won't see PepsiCo's drinks at Disneyland), movie theaters, and ballparks. Being exclusive gives it pricing power. Folks regularly pay $5 for a 20-ounce Coke at any one of these locations when they could easily buy the same for less than $2 at the grocery store. If inflation causes an increase in input prices, Coca-Cola can raise prices at these locations to offset the effect.
Besides raising prices, Coca-Cola has another avenue for offsetting inflationary pressure on profits; it can keep prices the same but reduce portions. For instance, in the example above, instead of offering a 20-ounce bottle of Coke for $5, it can offer a 16-ounce bottle for the same price.
If inflation causes price increases throughout the economy, and subsequently Coca-Cola needs to raise prices, one of the last products people would give up buying is likely Coca-Cola beverages. That's what makes Coca-Cola stock a good tool to help protect investors' purchasing power in the long run.