The Silent Confiscation of Purchasing Power
Inflation is often described by economists as a hidden tax. When inflation runs at 6% annually, a corporate treasury with $20M in idle commercial checking accounts loses $1.2M in real purchasing power every 12 months. In five years, more than a quarter of the firm's real wealth evaporates without a single line item appearing on the income statement.
Warren Buffett's Two Inflation Invariants
In his 1981 letter to Berkshire Hathaway shareholders, Warren Buffett identified the only two characteristics of businesses that consistently thrive through inflationary storms:
- An ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume.
- An ability to accommodate large dollar volume increases in business with only minor additional investment of capital.