Rising inflation could cause havoc in the economy. However, some UK shares are better placed than others to weather the effects of this economic phenomenon. Companies with large profit margins and pricing power can both raise prices to compensate for higher costs and have the flexibility to absorb rising costs in their profit margins.
These are the businesses that I would buy for my portfolio to navigate the current inflationary environment.
UK shares to buy today
The first company on my list is Diageo (LSE: DGE). With its portfolio of billion-dollar brands and 20%+ operating profit margins, it looks as if the corporation has the pricing power and margin headroom required to pull through the current inflationary environment.
However, the one thing that does worry me is the group’s debt. It has a fair bit of borrowing, the cost of which could increase if central banks hike interest rates to deal with rising inflation. This could have an impact on profit margins and overall cash flow.
Still, considering its competitive advantages, I think this is one of the best UK shares to buy as inflation surges. The firm is also looking to increase its footprint through acquisitions and organic growth over the next couple of years.
Property income
Secure Income Reit (LSE: SIR) was founded to generate long term, inflation protected income from real estate investments. This suggests it is one of the best companies on the market to own in an inflationary environment. The corporation invests in high-quality real estate assets, let to clients on long-term contracts, which have inflation uplifts built-in.
Few other UK shares offer this kind of inflation protection on the market. Property is also an excellent asset to own when prices rise as inflation can lift the value of real estate as well. As such, it looks to me as if Secured Income is doubly protected from inflationary pressures. Its assets and cash flows may both increase in line with price growth.
Once again, higher interest rates could become an issue for the group if they increase the cost of its debt. This may be the biggest challenge the company has to deal with in the years ahead.
Precious metals
Fresnillo (LSE: FRES) is the world’s largest producer of silver from ore and Mexico’s second-largest gold miner. This suggests the company has a certain level of information protection because the value of precious metals tends to increase in line with inflation in the long run.
Unlike owning precious metals directly, which can incur management costs, Fresnillo currently supports a dividend yield of 2.3%. If the price of gold and silver rises in line with inflation, the firm’s profits should follow suit. This should enable the business to increase its dividend investors.
That said, inflation may put upward pressure on the company’s wage bill. Higher costs could compress profit margins, leading to some tough choices for the management. This is probably the biggest challenge the group will face in the years ahead.
