Uncomfortably high inflation is a global phenomenon today, driven by high commodity prices and reopening demand. But it has only just shown up in the UK. According to numbers released today, annual inflation touched 2.1% in May.
This had me sit up and take note, for three reasons. One, inflation is now above the Bank of England’s target rate of 2%. If it persists, the BoE could start increasing interest rates. This could put economic recovery in danger.
Two, the number exceeds economists’ expectations. This means that inflation may well throw up ugly surprises in the coming months too. Three, inflation has sharply increased compared to April’s levels of 1.5%, which shows the kind of increases possible.
Investing in times of inflation
None of these risks may materialise. A number of economists believe that high inflation is transitory. But there are those who do not. Whatever I believe as an economist, however, I don’t think it hurts me to buy FTSE 100 stocks that are possibly inflation proof and also double up as either growth or income stocks or both.
I think there are two broad categories of FTSE 100 stocks that will remain unaffected by inflation. The first is companies whose products’ prices are already rising. In other words, they are gaining from inflation. The second is companies that can easily pass on these price increases.
FTSE 100 oil stocks to the rescue
In the first category are commodity stocks. Prices of commodities like oils and metals have been on the rise. As economic activity amps up through this year, it is possible they will rise further. Just today, there is a fresh report that oil prices could rise to $100 a barrel.
As an investor in the two big FTSE 100 oil companies BP and Royal Dutch Shell, I follow their developments closely. And their first quarter results were proof of how oil price increases can turn their fortunes around. Both companies have paid generous dividends in the past and I think they will continue to pass on their financial good fortune to investors in the future. Besides this, their performance should also add to increases in their share prices. They have not been great growth stocks in the past, but I reckon that could change now.
High-end retailers can pass on prices
In the second category is FTSE 100 luxury stock Burberry, which I also own. Its demand can be impacted by a slowing economy but less so by the level of inflation we have seen so far. I reckon it can pass on price increases more easily to consumers than retailers in lower price brackets.
Also, an improved economy will increase demand for its products. It has already expressed optimism about this year, which is unlikely to be dented by inflationary concerns. The only downside I see here is that Burberry’s share has already run up quite a bit. This means it may grow slowly from here, but I am prepared to hold it for the long term.
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Manika Premsingh owns shares of BP, Burberry, and Royal Dutch Shell B. The Motley Fool UK has recommended Burberry. 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.