The Motley Fool

3 ways inflation impacts my FTSE 100 investments and what I’d do now

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Dictionary definition of inflation
Image source: Getty Images.

Inflation is making a comeback. Prices have started rising and are expected to rise even more in the months to come. 

As consumers, this has a direct impact on our expenses. But did you know that inflation also impacts our FTSE 100 or any other stock market investments?

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Here are three ways my stock market investments are impacted by rising prices or inflation:

#1. Cost pressures

Just like inflation impacts my expenses, it impacts the expenditure that FTSE 100 companies incur too. Rapid oil price increases, of the kind we have seen in 2021, raise transportation costs for all companies. 

Depending on the industry in which these companies operate and where they are in the business cycle, they are likely to respond differently to rising costs. 

In a highly competitive environment like supermarkets, where the battle is price driven to attract consumers, it is harder to increase prices. So, I would reckon that FTSE 100 companies like Tesco and Sainsbury’s would quite likely absorb the costs, which can affect their bottom line. 

A hit to the bottom line can in turn affect their share price and the value of their shareholders’ investment.

#2. Price increases

However, not all companies will suffer from these cost increases. If they are differentiated on aspects other than price, like brand, they may well pass on these increases to consumers. An example I can think of is the FTSE 100 luxury brand and retailer Burberry

I doubt if any of Burberry’s customers will be put off if it passes on a 1% increase in inflation to them. But if my preferred grocer were to increase, say delivery charges and its own products’ prices, I might consider alterntives.

#3. Interest rate increases

Inflation can rise now as economic activity picks up, increasing demand. If producers are not adequately prepared, prices will rise. Policy makers are careful of this trend, because fast inflation can put the brakes to economic recovery. 

One way they respond is by increasing interest rates. Because of this loan growth can slow down and deposit growth can rise. If we raise less credit because it is getting expensive, we will potentially consume less and prices can stabilise. Also, we are incentivised to save rather than spend through increased returns on our deposits.  

If banks have the option to raise interest rates now, it can be good news for their earnings after operating in a really low-interest rate regime for a while now. I think FTSE 100 banks like Lloyds Bank and Barclays are well placed to capitalise from these opportunities. 

How I’d invest in FTSE 100 stocks now

Based on these potential effects on my FTSE 100 investments, I think it is evident that differentiated brands like Burberry and banks like Lloyds Bank and Barclays can win in an environment of rising inflation

Besides these, I have also written about other FTSE 100 stocks that are well placed to actually gain from inflationary trends. I would consider those too. 

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Manika Premsingh owns shares of Burberry. The Motley Fool UK has recommended Barclays, Burberry, Lloyds Banking 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.