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Spend & Save

Investment Insider: Inflation could be a friend to investors

Firms which can raise prices may be a good bet for future growth

Consumers might be one step ahead of many academics, experts and, more importantly, central bankers when it comes to the outlook for inflation.

According to a recent survey from Gocompare.com, over a third of UK consumers are worried about the rising cost of living. Meanwhile, many experts are assuring the markets that inflation is unlikely to be a problem. Their argument is that there is excess capacity in global economies. Consequently, with supply exceeding demand, they do not believe that prices are likely to rise.

However, consumers remain unconvinced, and they might have a point. The unprecedented amount of money that has been created since the financial crisis of 2007 could, in time, prove them, rather than the experts, right. Truth is, it is hard to imagine how the pumping of more than $12 trillion (£7.287trn) into global economies by various central banks can be anything other than inflationary. The danger for savers is that inflation erodes the buying power of money.

Over the long term, investing in the stock market has been a good way to ensure your savings can beat inflation. Historically, the stock market has nominally returned around 8 per cent, which is higher than the rate at which the price of consumer goods has been rising. The reason for the above-average return is simple – companies have to pass on price increases if they want to stay in business. However, not all of them can easily do this, so investors should try to focus on those that can if they believe inflation is likely to be a problem.

Utility companies, including Centrica, National Grid and SSE, are among those able to pass on price rises, though not without some fuss from both consumers and regulators.

Cigarette makers such as British American Tobacco (BAT) and Imperial Tobacco have some of the most stable net-profit margins among the UK's blue chips.

Tobacco might be seen as unethical by some investors. However, their ability to outperform the wider market should not be dismissed. Over the last 10 years, an investment in BAT would have increased sixfold, while Imperial Tobacco has returned around 260 per cent including dividends.

Pharmaceuticals are also seen as inflation-proof. If you need specific medication, the cost of acquiring the drug is, to some extent, almost irrelevant.

Food is another industry largely resistant to inflation. Companies with a wide geographic footprint could find that a slowdown in one region is compensated by higher growth elsewhere. Some of the more geographically diversified food producers in the UK include Unilever, which generates 40 per cent of its revenues from Asia, Africa and the Middle East and Tate & Lyle, which relies on the US for almost 60 per cent of its sales.

Associated British Foods is another notable food producer, but it also owns low-cost clothing retailer Primark, which accounts for about a third of its total business. In times of higher inflation, budget retailers are generally able to increase prices and still keep them at relatively affordable levels.

At the other end of the spectrum, high-end retailers, such as Burberry, could find that buyers for their products are not especially sensitive to price increases.

David Kuo is director of fool.co.uk