Warren Buffett called inflation a 'gigantic corporate tapeworm.' Here's the investor's classic warning about rising prices.

• Warren Buffett said costs were rising fast during Berkshire Hathaway's annual meeting.
• Buffett has called inflation a "gigantic corporate tapeworm" for investors and businesses.
• Asset-light companies that can raise prices and scale easily often weather inflation best.
• See more stories on Insider's business page.

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Warren Buffett said he was seeing "very substantial inflation" and homebuilding costs were "just up, up, up" at Berkshire Hathaway's annual meeting this year. The famed investor has warned of the brutal impact of rising prices on stock pickers and businesses in the past.

The Berkshire CEO described high inflation as a "tax on capital" that discourages corporate investment in his 1980 shareholder letter. The "hurdle rate," or the return on equity needed to generate a real return for investors, climbs when prices rise, he said.

"The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil," Buffett added.

The investor pointed out inflation can hurt more than income taxes, as it's able to turn a positive return on investment into a negative one. If prices have climbed enough, people who make a nominal return on their investment may be left with less purchasing power than before they invested, Buffett said.

Inflation also eats up companies' money, as rising costs force them to spend the cash they generate just to maintain their existing physical volume of business. Buffett described that impact as a "particularly ironic" punishment for bad businesses.

"Inflation takes us through the looking glass into the upside-down world of Alice in Wonderland," he said. A bad business "must retain every nickel that it can," he continued, even if can't deliver much of a return on those funds and would prefer to distribute them to shareholders. The reason is that it needs the money and might well struggle to raise fresh funds.

Buffett also emphasized the painful impact of rising prices on all businesses.

"Inflation acts as a gigantic corporate tapeworm," he said. "That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Regardless of a company's profits, it has to spend more on receivables, inventory, and fixed assets to simply equal the unit volume of the previous year," he said.

"The less prosperous the enterprise, the greater the proportion of available sustenance claimed by the tapeworm," Buffett continued. Asset-heavy businesses with meager returns on equity "have no leftovers" to spend on expanding, paying down debt, issuing dividends, or making acquisitions, he said. Spending cash in those areas could mean sacrificing sales volumes, long-term competitive position, or financial strength, he added.

"The tapeworm of inflation simply cleans the plate," Buffett said.

The Berkshire chief also described the kinds of businesses that weather inflation best. Those with valuable intangible assets and little need for tangible assets fare well, he said.

Companies can also stomach rising prices if they're able to hike their prices without sacrificing material market share or unit volumes, and adjust to big dollar-volume increases in business without investing much additional capital, he continued.

Buffett gave the examples of Berkshire-owned See's Candies and one of his company's biggest investments, Coca-Cola. Both companies have powerful brands that allow them to raise prices without losing a lot of business, he said, and don't require much capital to grow.