Inflation is on everyone’s minds right now. Businesses are concerned about rising input costs, while consumers have to worry about the dwindling purchasing power of their incomes. But as an investor, I’m looking at Rightmove (LSE: RMV), a FTSE 100 stock, to offer some inflation protection in my portfolio.
Let’s first take a look at inflation in the UK today, and then how Rightmove may help to protect my portfolio if inflation continues to rise.
Inflation in the UK today
According to official figures from the Office for National Statistics, the Consumer Prices Index (CPI) rose 3.1% in the 12 months to September 2021. This was actually a slight decline from the 3.2% CPI print in August.
But as an investor, I’m more interested in what the future holds and how my portfolio is positioned depending on the risks ahead. Let’s do a quick health check on inflation forecasts for the coming months.
At the Bank of England’s meeting on 22nd September, the Monetary Policy Committee projected that CPI is expected to rise further in the near term, to slightly above 4% in the fourth quarter of 2021. If CPI reaches 4%, this will be double the Bank of England’s inflation target of 2%, and be the highest inflation reading since 2011. Therefore, rising inflation is a risk I cannot ignore.
Pricing power and the property market
So how can I include some inflation protection in my portfolio? The real0estate sector might be just the place.
Generally, as property values tend to rise over time, owning real estate can be a natural hedge against inflation. And if property prices rise, this often equals higher rental income for investors. Certain commercial property leases are also linked to inflation, meaning rents rise in line with any increase in CPI.
However, while Rightmove is exposed to the property sector, it also has a key characteristic I look for in a business: pricing power. This means a business can raise prices without losing many customers as their products or services are valuable to the end user.
A key metric for Rightmove is Average Revenue Per Advertiser (ARPA). It offers a way of measuring pricing power and should ideally grow year-on-year. Excluding 2020 as it was impacted heavily by the pandemic, ARPA has grown each year for at least the previous 10 years. I think this demonstrates Rightmove’s excellent pricing power.
It should be noted that risks are still present, such as if we experience a new virus-related lockdown that impacts the housing market again. But for me, I will be adding to Rightmove in my portfolio as it looks to be a good hedge against rising inflation from its pricing power, and furthermore from its exposure to the property market.