Inflation is making a comeback. Prices have started rising and are expected to rise even more in the months to come.
As consumers, this has a direct impact on our expenses. But did you know that inflation also impacts our FTSE 100 or any other stock market investments?
Here are three ways my stock market investments are impacted by rising prices or inflation:
#1. Cost pressures
Just like inflation impacts my expenses, it impacts the expenditure that FTSE 100 companies incur too. Rapid oil price increases, of the kind we have seen in 2021, raise transportation costs for all companies.
Depending on the industry in which these companies operate and where they are in the business cycle, they are likely to respond differently to rising costs.
In a highly competitive environment like supermarkets, where the battle is price driven to attract consumers, it is harder to increase prices. So, I would reckon that FTSE 100 companies like Tesco and Sainsbury’s would quite likely absorb the costs, which can affect their bottom line.
A hit to the bottom line can in turn affect their share price and the value of their shareholders’ investment.
#2. Price increases
However, not all companies will suffer from these cost increases. If they are differentiated on aspects other than price, like brand, they may well pass on these increases to consumers. An example I can think of is the FTSE 100 luxury brand and retailer Burberry.
I doubt if any of Burberry’s customers will be put off if it passes on a 1% increase in inflation to them. But if my preferred grocer were to increase, say delivery charges and its own products’ prices, I might consider alterntives.
#3. Interest rate increases
Inflation can rise now as economic activity picks up, increasing demand. If producers are not adequately prepared, prices will rise. Policy makers are careful of this trend, because fast inflation can put the brakes to economic recovery.
One way they respond is by increasing interest rates. Because of this loan growth can slow down and deposit growth can rise. If we raise less credit because it is getting expensive, we will potentially consume less and prices can stabilise. Also, we are incentivised to save rather than spend through increased returns on our deposits.
If banks have the option to raise interest rates now, it can be good news for their earnings after operating in a really low-interest rate regime for a while now. I think FTSE 100 banks like Lloyds Bank and Barclays are well placed to capitalise from these opportunities.
How I’d invest in FTSE 100 stocks now
Based on these potential effects on my FTSE 100 investments, I think it is evident that differentiated brands like Burberry and banks like Lloyds Bank and Barclays can win in an environment of rising inflation.
Besides these, I have also written about other FTSE 100 stocks that are well placed to actually gain from inflationary trends. I would consider those too.