UK’s inflation problem just got bigger. Here are stocks I’d buy

Dictionary definition of inflation

Chancellor Rishi Sunak’s latest budget has a lot to unpack. But even before I can start addressing what the policy changes are, I have to talk about inflation. In his speech, the chancellor raised a huge red flag by saying that inflation is expect to average 4% in the next year! The operative word here is ‘average’. This means there could be months when inflation is even higher than that. 

High inflation, but at least there’s growth

That the Bank of England’s comfort level of inflation is 2% puts the gravity of this situation into perspective. It also leaves no doubt that interest rates could start rising at speed. There is some comfort in the fact that growth is also expected to be strong, however. The Office of Budget Responsibility estimates that the UK economy will grow by 6.5% this year, and by 6% next year. 

One FTSE 100 stock that could suffer

So the silver lining is that at least we are not looking at stagflation! The latest data had me concerned that growth could be minuscule and inflation high, which is a bad combination for any economy. But not all FTSE 100 stocks will escape the high inflation challenge. Long-distance airlines like International Consolidated Airlines Group (IAG) is one that can[should] brace for impact. 

IAG is already in a funk, thanks to the pandemic. It also flagged rising fuel prices as a cause of concern earlier this year. It is already making a loss, and higher costs do not help its situation. Moreover, the budget also says that long-distance air travel will now attract higher air passenger duty. The higher duties will kick in only in April 2023, and are expected to be imposed on a small fraction of total travel. However, they do add to the bad news for the company. 

2 FTSE 100 stocks I’d buy

It is not the most environmentally friendly solution, but I think that as an investor, big oil stocks like BP and Royal Dutch Shell are good FTSE 100 shouts. Both stocks are contributors to inflation, rather than at the receiving end like many others. As oil prices rise, their fortunes actually improve.

This results not just in capital gains for me as an investor but also in higher passive income as the companies could distribute bigger dividends. This could also cancel out the real impact of inflation on my earnings as well. My passive income from these stocks may just  make up for the loss in real value of my income. 

Also, as growth is expected to be better than initially expected, there is little danger of oil prices falling off a cliff any time soon, since demand will be strong. So for the foreseeable future, I intend to hang on to my investments in both these oil stocks. I may just increase my holdings in them now as well.

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More reading

  • Autumn Budget: Government ‘willing to act on inflation’. What will this mean for mortgages and savings?
  • Stocks that rallied after the UK budget 
  • UK stocks that could rally after the budget
  • Budget 2021: what do the Universal Credit rule changes mean for me?
  • Autumn Budget: will it cost me more or less to fly?

Manika Premsingh owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. 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.