On the taxi ride back home from the LF Wade International Airport a couple of weeks ago my unapologetic driver informed me the fare had gone from the usual $30 to about $40, a 33 per cent increase. That made me think of a topic which I believe every investor should take time to consider. Despite recent intense government discussions about deflation (lower prices in the future), signs of inflation abound. Certainly, investors and consumers should care about price inflation, especially in areas where Uber-type services are not thriving. But more on this last point later.

Most economists measure inflation using a standard index which tracks the price of a basket of goods and services over time. Popular inflation measures include the US consumer price index (CPI), the producer price index (PPI) and the personal consumption expenditures price index (PCE).

The PCE is Federal Reserve’s preferred benchmark used to help set monetary policy. The Fed likes the PCE index because it accounts for consumers changing spending patterns from month-to-month whereas the CPI basket changes only every few years.

All measures of inflation have pros and cons. For example, the ‘core’ PCE number, which the Fed regards as most important, strips out food and energy prices. But most consumers would agree these are items which meaningfully impact their budgets. Nevertheless, the Federal Reserve generally dismisses food and energy prices as being components which are too volatile to be included in their key benchmarks.

In Europe, a region historically haunted by inflation but where deflation is now the watchword, economists use the Harmonised Index of Consumer Prices (HICP). The HICP is compiled by the Eurostat agency in accordance with harmonised statistical methods. Like America’s core indices, HICP excludes food and energy prices; however, the HICP also drastically minimises housing prices, including only ‘rents’ and then weights them at a mere six per cent.

Most of the widely used measures of inflation appear relatively tame by historical standards. For example, the core PCE index has been rising less than 1.5 per cent annually on a year-over-year basis for the past couple of years. Drivers of falling prices or ‘deflation’ include globalisation, technology and the economies of mass purchasing power.

About a decade ago, author Charles Fishman popularised the concept of “the Wal-Mart effect” in a book detailing how the world’s largest retailer used its immense scale to force suppliers to reduce prices and then passed those savings on to consumers. Wal-Mart was also early in deploying technology for inventory management and in ensuring that competitors could not beat their prices.

Later, even more competition came through Amazon.com, now the largest online retailer, literally a store without stores. In the world of Amazon, shoppers have broad access to shop across a wide spectrum of goods offered by numerous vendors for each product. With the click of a mouse button, consumers can buy products at virtually wholesale prices. The online ‘stores’ have no rent to pay and must match other retailer prices at cut-throat levels to stay in business.

Now back to the Uber effect. Uber is a software-based ride sharing program which aims to displace a good part of the global taxi business. Combining Wal-Mart’s idea of just-in-time inventory delivery with Amazon’s concept of cutting out the middleman, a ride sharing service is being offered more efficiently and usually at better prices. In the case of Uber, the passenger simply launches the app on a smart phone, gets a price for the ride and confirms the journey. Everything is done online.

What I call the ‘Uber effect’ represents the spreading of the ‘Amazon effect’ from goods to services. Economists have also labelled this phenomenon the ‘sharing economy’ where a single asset is shared by multiple users thereby improving efficiencies and effectively reducing the price per use. Other services employing this strategy include Airbnb for lodging and Snapgoods for items such as high end cameras.

While prices of some goods and services have been contained others keep going up. Medical cost inflation remains stubbornly high and home prices are rising much faster than wages in many markets. In Bermuda, Government-mandated HIP rates are up 12 per cent.

Meanwhile, lower interest rates and a return to speculation are drive home prices higher, especially for those who do not yet own one or are looking to upgrade. Earlier this month Wall Street Journal ran a lead story highlighting the difficulty younger people are now experiencing in attempting to buy a new home. The median existing home price in the US rose another 8.9 per cent above prior year’s average according to the National Association of Realtor’s latest monthly report. And yet, the PCE, the HIPC and CPI indices largely dismiss this variable.

Notwithstanding the many countervailing forces in today’s economy, inflation is likely here to stay and over time prices eventually tick higher. Therefore, a key concern for investors should be how to structure one’s investments to at least keep up with the broader measures of inflation.

Historical studies show that stocks can provide a hedge against inflation over the long term as long as inflation is relatively subdued. Successful companies with market leadership are usually able to pass along higher costs on to consumers. Higher prices for businesses typically result in higher profits, bigger dividends and ultimately better share prices. Certain bonds such as inflation-linked securities can also protect purchasing power.

Every serious investor should consider the notion of inflation in setting objectives. While the magnitude of future price increases may be difficult to predict, the direction is certain. Tomorrow’s dollars, euros or pounds will have less purchasing value than they have today.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.