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As Inflation Rises, Here Are the Shares to Avoid and Those to Buy

By Malcolm Stacey | Wednesday 15 February 2017

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Hello Share Toppers. Allow me to take a tiny break from recommending stocks which could soar to another figure which is on the increase. And that’s inflation, which has risen for the fourth month in a row. How will this trend affect our shares?

It came in at 1.8% last month, the highest for two and half years. Some sectors should see a rise in share prices, others will probably fall if inflation continues to mount.

The biggest impact is the fear, rather than perhaps the reality, that interest rates will need to go up. The Bank of England sees a higher rate as a good way of curbing inflation.

The biggest effect of that on ordinary folk is higher mortgage payments. That limits spending - and retail shares will be among the first hit.

But higher interest rates will send bank shares shooting up. So if you think interest rates will rise this year, you should come out of less defensive shares - like purveyors of luxury goods, say, and move into financials.

Rising inflation is bad news for supermarket shares. These are already in jeopardy as the weakened pound makes food imports more pricey. That will eat into store profits.

The falling pound is causing the higher inflation in the first place, as manufacturers are having to pay more for most of their raw materials from abroad. So far, they have only passed on about 4% of costs whereas the pound has fallen by about 20%.

Rising petrol and energy prices have also boosted inflation. The price of crude oil is rising, but not as fast as prices at the pump. This means extra profits for big oil companies like Shell (RDSA) and BP (BP.). So that might be an area to look at, if inflation keeps moving up.

Some shares will not be affected by inflation at all, though. And those are in the defensive sectors like pharmaceuticals and some travel which people find hard, if not impossible, to cut down on.

So it seems that rising inflation is not going to be a serious problem for share shifters like us - but only if we choose the right sectors to invest in.

Time for a swiftie in the Punter’s Return?

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