CFA answer on impact of contractionary deflation to asset-intensive/commodity-producing equities:
The fund’s holdings of asset-intensive and commodity-producing firms will be negatively affected by falling inflation or deflation. Within the equity market, higher inflation benefits firms with the ability to pass along rising costs. In contrast, falling inflation or deflation is especially detrimental for asset-intensive and commodity-producing firms unable to pass along the price increases.
The last sentence is confusing. why would firms be needing to pass along price increases during deflation ??? Don’t prices decline?
Hey oldman. Yes, I think it’s just a poor/confusing phrase - “falling inflation”. I’d say don’t overthink it. In deflationary environment, prices decrease and that gets reflected for commodity producer, which negatively impacts their bottom line.
Negative in deflation. But positive in inflation like the current environment we’re in. Case in point, commodity producers in inflationary environment are great places to be in compared to consumer cyclical companies.