As if the previous inflation numbers were not bad enough, it gets worse. In December 2021, the UK’s inflation, based on the Consumer Price Index (CPI), rose to 5.4% on a year-on-year basis, up from 5.1% in November. So far, it has not had an impact on stock markets. The FTSE 100 index is actually inching towards 7,600 as I write this Wednesday morning, completely ignoring the inflation print.
What’s the impact of high inflation?
This is fortunate, but I do believe that the uncomfortably high price rise could take a toll on companies’ financial health over time. It already has started to do so, which is also why inflation is rising. At least some companies are passing on increased costs to customers now. In fact, it has now risen enough to impact wages. Real wages in the UK have fallen for the first time in November 2021 since July 2020 as inflation rises. This essentially means that the average person is able to afford less now, which of course is bad news for both consumption and investments, and from there, the stock markets.
But as an investor, there is very little I can do about high inflation. What I can do is make investments that will give me positive real returns despite rising prices and help tide me over this phase. There are many ways to do this. First, I’d consider stocks most likely to be impacted by rising inflation.
Stocks I’d be careful about now
All companies that sell price-sensitive products could be affected, making me cautious. I am thinking of FTSE 100 grocers like Tesco and J Sainsbury. And also high-street retailers like JD Sports Fashion and Next. Even delivery service providers like Ocado could take a hit as the average consumer cuts back on expenses. Similarly, other stocks associated with e-commerce could be impacted as well. These include the likes of warehouser Segro, parcels’ provider Royal Mail, as well as packaging providers like Smurfit Kappa, Mondi, and DS Smith.
I like many of these stocks for other reasons and hold some of them in my portfolio too. They have shown fast recovery recently, adaptability during the pandemic and their prospects look good too. But I would watch out for the impact inflation could have on them and act on my investments accordingly.
Stocks to buy
However, like there are stocks that could face the brunt of inflation, there are those that could gain from it. The headline ones among these are oil stocks, which have seen a huge turnaround in fortunes as oil prices have risen over the past year. BP and Royal Dutch Shell are my favoured stocks to beat inflation. I am also optimistic about the prospects for banks like Lloyds Bank and Natwest, which could benefit from rising interest rates in the UK, since their margins could improve.
However, no company is immune to the negative fallouts from inflation if it rises too much. Inflation could impact demand and economic growth, which in turn is likely to affect demand for both oil and for loans. With interest rates on the rise and a withdrawal of public spending though, inflation could well come under control soon. So I would stay optimistic for them. I have already bought the oil biggies and am planning to buy banks now.
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Manika Premsingh owns BP, JD Sports Fashion, Ocado Group, Royal Dutch Shell B, and Royal Mail. The Motley Fool UK has recommended DS Smith, Lloyds Banking Group, Ocado Group, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
