The rate of inflation across the UK hit 2.5% in the year to June. That was the highest in nearly three years as food and fuel costs accelerated.
Rising prices have led some economists to start expressing concern that we could be set for a period of elevated inflation. This could be damaging for equities. Companies with exposure to fixed contracts may find it harder to pass on price rises to customers. That would depress profitability.
Companies may also find it harder to hire staff if wages are rising rapidly, making it harder to provide services to customers.
However, some companies may perform better in an inflationary environment than others. Here are five stocks that I would buy or already own for their unique qualities, which could protect against inflation.
Stocks to beat inflation
Fixed assets such as property have been good hedges against inflation in the past. While past performance is no guarantee of future potential, I would buy SEGRO and Secure Income REIT as inflation hedges.
Not only do both of these companies own a portfolio of properties, which should increase in value with inflation. But they have also signed contracts with tenants whereby rents increase with inflation every year. Unlike other commercial property stocks, these organisations have also performed relatively well during the past 12 months due to their exposure to warehouses and essential retailers such as supermarkets.
That being said, both firms also have a fair bit of debt. This could become more expensive if interest rates increase. This is probably the biggest challenge they face today.
Two other companies I would buy to protect against inflation are Rio Tinto and BHP.
One sector experiencing the most aggressive price hikes is the commodity sector. For example, the price of iron ore has jumped over 100% in the past year and is currently trading near a record level of $218 per tonne. This will feed through into high prices for steel producers and construction firms.
For mining groups like Rio and BHP, higher prices could produce windfall profits. Production costs at these two firms are less than $30 per tonne of iron ore, which gives some indication as to the sort of profit margins they are currently seeing. Unfortunately, commodity prices can fall just as fast as they have risen over the past 12 months. As such, there is no guarantee either company will continue to generate excessive profits.
Still, I would buy these two mining groups for my portfolio to protect against price rises.
Perfectly positioned
The final company that I would buy in this scenario is one I already own. Personal Assets Trust is an investment trust with a broad mandate. It can invest almost anywhere.
The trust has been positioned for rising inflation for some time. Around 9% of the portfolio is invested in gold, which has historically been a good hedge against rising prices.
Another 33% is invested in index-linked or inflation-protected bonds, and the remainder of the portfolio is invested in equities.
There is no guarantee this mix of assets will protect investors against rising prices. Nevertheless, I have been buying the trust for my portfolio as an inflation hedge recently.
