2 UK shares to help my portfolio beat rising inflation

UK shares could be hit if inflation rises to 4% and yet in both the short and long term these two shares should do well regardless.

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It has been reported that inflation could reach 4% this year. Eventually, that could put pressure on the Bank of England to increase interest rates. Conventional wisdom is that this would be bad for the stock market and UK shares. 

However, I believe shares with pricing power, global markets, and strong brands will continue to deliver. There are two UK shares I think I’d be happy to hold for a decade, come what may with inflation or the wider economy. They are that good.

The UK share to beat inflation

The first is drinks giant Diageo (LSE: DGE). Its notable collection of strong brands includes Smirnov, Guinness, and Johnnie Walker. Customers are loyal to these brands, allowing the company to charge higher prices. As a result, the beverages company has maintained an impressive average gross margin of 61% over the last five years.

The reopening of nightclubs in the UK, and presumably in other countries as well, provides the potential for the shares to keep recovering.

A strong recent update

Last month Diageo revealed that full-year net sales rose 16% to £12.7bn, on an organic basis. That reflected growth in all regions, and the effect of easier comparisons from last year’s disruption. The group is also increasing the final dividend of 44.59p per share, an increase of 5% on last year.

The dividend increase shows management’s confidence in the future of the business.

The risk would be mainly related to any further lockdowns or spread of the virus. If big customers in the leisure industry are shut down again then that would hit sales. As such there could be some bumps in the road short term but over 5–10 years I think the shares will increase in value.

Overall I think Diageo is a good long-term hold and I’ll keep adding more of the shares to my portfolio. Its pricing power, well-known brands, high margins, and international sales all lead me to think it’s a share that should do better if inflation does keep rising.

Another option for UK investors

I think the retailer Dunelm (LSE: DNLM) could also pass on any increased costs to customers. The homeware retailer has been one of the most successful listed retailers in recent years.

Like Diageo, it’s another Covid-19 recovery stock. Shops should hopefully remain open now, helping it make more money.

The fact the share price has been falling just makes the shares cheaper and better value, in my opinion. 

Global supply chain issues are probably one of the main concerns. Then again any setbacks when it comes to the bounce back from Covid would also very likely hit the share price. These risks though seem very manageable and aren’t overly concerning from my perspective. They would affect competitors as well.

I think Dunelm is another share that could do well in the long term, but also do well shorter term through any period of higher inflation. As such, I might well add it to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Andy Ross owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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.

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