Why I need to earn passive income during times of high inflation

The one big macro risk to investing in 2022 for me is inflation. The latest inflation numbers continue to look uncomfortably high, and forecasts do not offer much respite either. I expect FTSE 100 companies’ updates to talk of inflation far more than they did in 2021, which was a fair bit already. This could create some stock market uncertainty. But I think even that might be less of problem than the rise in cost of living because of higher prices. And this is where passive income comes in. 

Passive income is a buffer against rising inflation

In December 2021, the UK’s headline inflation grew by a huge 5.4% on a year-on-year basis. In comparison, average earnings grew by 3.5% during the month. This means that rising prices have already outstripped wage growth, and I reckon we have probably not even seen the worst of inflation yet. In effect this is saying that earned income is now officially buying me less than it was earlier. If I want to maintain my standard of living now, I need to find alternative sources of income. And dividend income could well be one way of doing so. 

It is quite fortunate I believe at this time that FTSE 100 dividends are on the rise. Economic recovery is underway, which is one of the reasons that inflation is rising, but it is also creating better conditions for dividends. And this is particularly so for stocks that actually benefit from rising prices, or are, at the very least, unaffected by them. 

Hedging with oil stocks

My big picks for the year, as I have written about a few times in the past, are oil stocks. Rising fuel prices are one of the key reasons that prices are rising. And oil stocks are benefiting from the trends. They are likely to continue doing so in the near future as well. I have already bought them, and while so far they are not exactly the best performing dividend stocks around, I expect passive income from them to improve in 2022. That is of course if the pandemic does not return. And there are no guarantees it will not, considering the fast rate at which its variants develop. 

Utilities offer a solution

I also like stocks of utilities, some of whose dividends are inflation-linked. Inflation this year would, of course, be far in excess of the average inflation they take into consideration, but I still think that is better than nothing. Besides, some of their higher costs would also be passed on to consumers. Indeed, they already have been. 

Even though higher utility bills could be a big potential national problem in 2022, the companies themselves might still be insulated. It appears that the government could have to bear part of the burden like in other European countries, through tax cuts. To put it another way, I think rising electricity and gas costs might not have a significant impact on utilities’ earnings. I would buy some utility stocks now.