For anyone following the stock markets in the past few days, the latest inflation numbers would have been hard to miss. In November, annual inflation based on the Consumer Prices Index came in at 5%. This is a massive increase, and far higher than what the central bank believes it should be for sustainable growth. It prefers a number around 2%.
The impact of high inflation
I would not be too concerned about it if it were a one-off figure. But that is not the case. Inflation has been on the rise for months now. And many FTSE companies, from retailers to airlines, have flagged it as a source of concern. Moreover, I am most uncomfortable with the fact that it is expected to stay elevated next year as well. Some forecasters believe that inflation will average 4% next year.
This is not good news for stock markets in a number of ways. High prices mean that you and I now have to set aside a bigger proportion of our incomes for making our purchases than before. As a result, we could have at least marginally lower savings for investments. And that marginal amount across all investors can add up to a lot less money going into investments. This in turn could slowdown stock markets’ growth.
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Of course, it can be argued that if more money is being spent on consumption, then FTSE-listed companies could stand to gain. That could be true if they are able to pass on cost increases to end customers and not lose any customers in the process. Also, their bottom lines might still be impacted if they are unable to pass on the entire costs. And lower profits can impact publicly listed companies’ dividends and their stock prices. I think we could even see a stock market crash.
Hedging my stock market investments
The point that it all really comes down to is this. High prices impact our real incomes. With less to save and to spend, many participants in the economy are likely to be adversely impacted. And that includes both companies and individuals. There are some, however, that stand to benefit.
The most obvious beneficiaries of high inflation are big oil companies right now. Oil price increases are driving high inflation, since the product is such an integral part of our daily lives. I believe that at least in the next year, buying stocks of these companies is a great way to hedge my stock market investments from inflation. They FTSE 100 oil stocks have already done quite well this year, and I reckon they will continue to do so in the foreseeable future as well.
Of course if we go into another lockdown, oil demand will drop and the party will at least temporarily be over for these stocks. Also, their long-term future is precarious, considering the ongoing shift towards clean energy. Nevertheless, for now, I think buying these stocks is a good way to counter the impact of inflation on my investments. That is why I have bought them already.
