Deflation calling: how to make money when prices are falling

"The fact that inflation is low is not, by itself, bad; with low inflation you can buy more stuff." So said none other than European Central Bank president Mario Draghi back in June, 2013.
And on that narrow basis, Australians should be rather pleased by Wednesday's news that headline annual inflation had dropped to 1.7 per cent over the December quarter from 2.3 per cent: more bang for your buck.
Naturally, it's never that clear cut. While disinflation or deflation are good for shoppers, they are less good for shops.

"Non-alcoholic ready to drink" prices – that is, for bottled soft drinks, juices and water – fell 0.1 per cent over the December quarter, making it three straight quarters of deterioration. That's not great news for Coca-Cola Amatil, where margins are already under pressure.
In electrical goods, deflation in audiovisual and IT goods over the most recent quarter worsened to 9 per cent from 6 per cent, reflecting "aggressive discounting" according to analysts at Deutsche Bank. Appliance prices fell 2.1 per cent – the weakest result since September, 2013 – and "a negative" for retailer Harvey Norman, the analysts say.
Meanwhile, the potential of stagnant food prices in 2015 has Citi analysts warning of possible unexpectedly low sales growth among the major supermarket players which, in turn, may lead to investors being prepared to pay a lower multiple for the earnings of Woolworths, Wesfarmers and Metcash.
"The potential earnings per share downside is 3 to 5 per cent for Wesfarmers, Woolworths and Metcash," write the Citi analysts. "Comparable store sales growth could drop to less than 1 per cent across the supermarket industry."

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