2 UK shares I’d pick to beat inflation

For years, interest rates have crept lower and lower. Inflation, once a value-destroying attacker that mercilessly stalked the economy, seems to many people like a distant memory.

But inflation is typically part of the economic cycle. While some people believe inflation is defeated, many experts expect that, in future, inflation could come back with a vengeance. When that happens, some assets are worth less because the currency is effectively devalued. That is why some investors like to invest in a ‘store of value’, which they think can shield them against inflation. Some shares can be a store of value against inflation. Here are three UK shares I’d buy now to try and beat inflation.

High income – and pricing power

I like tobacco stocks in general because they often have high dividend yields. For example, Imperial Brands currently yields almost 10%. That is a very agreeable return in my opinion. Of course, dividends can be cut – Imperial cut its last year, in fact. But I think the company’s new strategy of focusing on cigarette brands in its biggest markets should help it improve its income for many years to come.

But another reason I like dividend stocks is because they act as a store of value. If rapid inflation sets in, some companies find it hard to pass on the full price impact to customers. That means their profit margins fall. Inflation-reduced income could hurt such UK shares.

But some product and service categories are able to pass inflation on to their customers in the form of a price increase. A lot of utilities can do so, as their pricing agreements with regulators tie price increases to the inflation rate. Similarly, tobacco companies have a lot of pricing power because consumers crave their product. So typically they can pass on inflation by way of price rises too. There is always a limit: too high a price rise could put off some fairly hardened smokers. But in general I like tobacco shares as a store of value, which is one reason I own Imperial shares.

These UK shares benefit from luxury spending

Another type of share that can do well as a store of value is shares in luxury companies. Companies providing expensive, high-margin products to well-heeled customers often have flexibility to increase prices. A customer at Tesco might notice if a packet of potatoes is 10p more expensive than at Sainsbury’s, for example. But someone buying a sports car or items of high fashion is less likely to be as fixated on price. Instead they look at the attractiveness of the brand and product.

So I think fashion house Burberry, for example, could be a good choice among UK shares to beat inflation. The company’s exposure to the East Asia has helped it recover from the pandemic while European markets are closed. Its shares are up almost 30% in the past three months. Ongoing lockdowns in some markets could cut income, and recession could damage luxury spending. But I would consider buying them now to try and beat inflation.