In recent years, we have seen clear price changes for many products in Europe and around the world. Let us therefore take a look at price trends since 2008 to find out which products and categories have experienced the biggest price increases. Let us try to answer the question of whether investments in the most inflationary sectors offer attractive investment opportunities.
Table of contents:
- What is inflation due to?
- Inflation in Europe and Poland. These products are getting more expensive the fastest!
- Is it worth investing in inflationary industries?
What is inflation due to?
Inflation, particularly acute in recent years, is an increase in the general price level of products and services in the economy. It leads to a decline in the purchasing power of money. It is a complex process whose causes can be varied and multidimensional. Here are some key factors influencing inflation:
- Money supply: An increase in the amount of money in circulation by the central bank, without accompanying economic growth, leads to higher prices when more money corresponds to the same amount of goods and services.
- External conditions: External factors such as exchange rate fluctuations, trade policy or global crises (e.g. wars or pandemics) can also affect inflation. An example is a weakening of the domestic currency that increases the price of imported goods.
- Fiscal and monetary policy: Decisions on interest rates, taxes and government spending directly affect inflation. For example, low interest rates can stimulate the economy by increasing demand and prices.
In the current economic reality, where currencies are not pegged to gold, almost all central banks set an annual inflation target of around 2%. This means that money in the current environment has virtually lost one of its three historical functions, which is to preserve value over time. As a result, practically everyone who does not invest their savings is exposed to a certain loss of value of their wealth.
Inflation in Europe and Poland. These products are getting more expensive the fastest!
Over the past 16 years, prices in Europe have increased by an average of 39.7%. The biggest increases have been in the prices of housing, gas and electricity, which have risen by 53.3%, followed by the food and non-alcoholic beverages category, with an average price increase of 51.6%.
Source: Conotoxia own analysis, ECB data
If we look at individual products, we can see that by far the strongest price increase in Europe was for energy, with a total of 107%, followed by oils and fats, which rose by 102%, and closing the podium was tobacco products, i.e. cigarettes with a 101.6% increase.
Source: Conotoxia own analysis, ECB data
Taking the example of Poland, a country that has experienced one of the highest inflation rates in Europe in recent years, we note that the biggest price increase since 2008 was in the mining sector, where prices more than doubled, by 159%, covering coal and metal ores. In second place in terms of increase were the prices of electricity, gas and water, which became more expensive by 152%. At the end of the list are the prices of pigs and poultry, with an increase of 150%. It is interesting to note that we can also see the impact of the opening of European markets to grain from Ukraine, which, despite high inflation, has led to a fall in the prices of wheat by 11% and rye by 18% since 2008.
Source: Conotoxia own analysis, GUS data
It is worth noting, however, that inflation has not been uniform throughout the period under review and only started to rise significantly from the beginning of 2020. Until then, it rarely exceeded the 3% annual level. When analysing the five categories most susceptible to inflation, we note that only the prices of tobacco products increased regularly.
Source: Conotoxia own analysis, ECB data
Is it worth investing in inflationary industries?
Energy commodity prices were the clear leader of the increases. When comparing the performance of the Energy Select Sector SPDR Fund (XLE) with that of the main S&P 500 Index (US500), we note that despite an exceptionally good period for energy producers, their share gains are virtually identical to those of the S&P 500 Index.
Source: Tradingview
Against the backdrop of regularly rising tobacco and tobacco product prices, a look at the situation of one of the industry's largest manufacturers, British American Tobacco, reveals that despite the increase in product prices, this has not been the best phase for the company. The company's shares have seen a 31% decline since 2020. However, it is important to note that additional levies and taxes are regularly imposed on tobacco products, which contribute significantly to the rising prices of cigarettes, among others.
Source: Tradingview
Although some industries experiencing high inflation may at first glance appear attractive to investors, deep analysis and caution is required, as price increases do not always go hand in hand with favourable share performance of companies in these sectors.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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