David Kuo: Avoid the oil-price shock by investing in flexible friends

Investment Insider

One pound would have bought three gallons of petrol 40 years ago.

Today, a pound would buy just a little over a pint of unleaded fuel, and events in the Middle East have raised concerns that fuel could soon cost much more. Worries came to the fore after crude prices jumped to a 30-month high.

Recent events in Libya, the world's 12th-largest oil producer, precipitated the sudden rise to more than $108 a barrel. But the main driver of prices over the past two years has been loose monetary policy and quantitative easing in western economies.

It is unlikely the Middle East mayhem will cause oil prices to quadruple as in the 1970s. But investors should be mindful of the damaging effects of inflation, and position investments accordingly.

Unfortunately, it is pointless to look to the Bank of England for succour: it prefers to nurse the economy back to health rather than cauterise inflation. It believes it is powerless to curb inflation imported through higher energy, labour, and commodity prices elsewhere. It is right up to a point. Inflation is being imported from places such as China, which has to contend with soaring raw material prices – cotton has leapt 150 per cent in the past year – as well as double-digit rises in labour costs.

The European Central Bank is unlikely to be as relaxed about rising prices as the Bank of England. In February, output price inflation in the eurozone jumped furthest since 2002 as businesses passed on higher costs to customers.

Therein lies a clue for investors: businesses are keen to convey higher input costs if they want to maintain profit margins and invest. We can tap into this by investing in businesses that can raise prices.

One of the simplest ways to do this is through low-cost index tracking funds. According to the latest Barclays Capital equity gilt study, £100 invested in shares 40 years ago would have turned into a nominal sum of £11,938 today.

David Kuo is director of financial website - fool.co.uk