What Is Inflation? Why It Matters for Brands and Investors

Inflation gets mentioned constantly in financial news — but what does it actually mean for the brands you follow and the companies you invest in?

The Simple Definition

Inflation is the rate at which prices rise over time.

If a coffee costs £3 today and £3.15 next year, that's roughly 5% inflation on that coffee. The same amount of money buys you less than it did before.

Inflation is measured across the whole economy — thousands of goods and services — and expressed as a percentage. In the UK, the headline measure is the Consumer Price Index (CPI).

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Why Does Inflation Happen?

Too much money chasing too few goods. When people have more money to spend (from stimulus payments, low interest rates, or rising wages) but the supply of goods doesn't keep up, sellers can charge more.

Supply chain disruptions. When it costs more to make or ship things — as happened during and after COVID — those costs get passed on to consumers.

Energy prices. Energy underpins almost everything. When oil and gas prices rise, nearly every good and service gets more expensive to produce.

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How Inflation Affects the Companies You Follow

Inflation hits businesses in two ways simultaneously:

Cost inflation — the cost of making products rises. Raw materials, energy, shipping, wages — all become more expensive. This squeezes margins.

Consumer pressure — when consumers feel squeezed by rising prices, they spend less freely, trade down to cheaper alternatives, and become more price-sensitive. Luxury and premium brands can suffer.

This is why you'll often see gross margins fall during high inflation periods — companies absorb some of the cost increases rather than passing them all to customers.

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Pricing Power: The Key Inflation Metric for Brands

The brands that weather inflation best are the ones with pricing power — the ability to raise prices without losing customers.

Apple can raise iPhone prices and most loyal customers still buy. That's pricing power. A generic supermarket-own-brand cola has almost none — raise prices and shoppers switch to a cheaper alternative immediately.

This is why strong brand equity has real financial value. It protects margins during inflationary periods.

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Inflation and Interest Rates

Central banks (like the Bank of England or US Federal Reserve) fight inflation by raising interest rates. Higher rates make borrowing more expensive, which cools spending and slows price rises.

For investors, rising interest rates typically hurt stock prices — because borrowing becomes more expensive for companies, and because bonds (a competing investment) become more attractive relative to stocks.

When inflation falls and interest rates come down, stock markets often rally.

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See It in Action

Inflation has been a constant theme across the earnings articles on Ask AYO:

• H&M Q1 FY2026: CEO Daniel Ervér cited "sustained inflationary pressure on the consumer" as a reason why European customers were more cautious and promotion-seeking than in previous years.
• Nike Q3 FY2026: Tariffs (a form of cost inflation) directly compressed gross margins by 130 basis points. Without them, margins would have expanded.
• Lululemon Q4 FY2025: The company cited a "cautious consumer environment" — partly a hangover from years of inflation eroding spending power in their core US market.

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The Bottom Line

Inflation is one of the biggest forces shaping how businesses perform. It squeezes margins, pressures consumers, and forces companies to make difficult choices about pricing. Understanding inflation makes earnings reports significantly easier to interpret — because when margins fall or consumer spending weakens, inflation is often the underlying cause.

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Related Reading

• What Is Gross Margin?
• What Is a Stock?
• Bull vs Bear Market