Which shares will survive inflation hit?

Firms forced to raise prices could lose customers and cut profits. But some have 'pricing power'. Simon Read reports

Inflation slipped slightly last month but, with soaring energy prices, is almost certainly going to climb in the coming months.

Will it top 5 per cent? The Bank of England thinks so.

The minutes of the Bank's Monetary Policy Committee meeting earlier this month revealed: "Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5 per cent, in the coming months."

The fears are that rising gas and electricity prices – with three of the big six firms already announcing hikes of around 18 per cent in the next two months – will quickly push inflation to a 20 year high of 5.5 per cent or more.

High inflation has already had its effect on consumers. The latest Nationwide Consumer Confidence Index published on Thursday made for grim reading. The Index stands 11 points lower than at the same time last year and 28 points below its long-run average. With confidence about the economy low, people are cutting back.

For investors, inflation can offer opportunities. For instance, Mick Gilligan at stockbroker Killik tips agribusiness Syngenta as well-placed to benefit from rising food prices. The company uses biotechnology and genomic research to increase crop productivity.

"With strong exposure to the theme of growing food needs and a larger emerging markets middle class, Syngenta is a buy," he says.

In the UK, with food bills climbing, supermarkets could clearly profit. But loyalty may go out of the window as household budgets are tightened and shoppers seek keener prices. For that reason, the more heavily discounted chains – such as Lidl, Aldo and, in the clothes sector, Primark – may see an upsurge in demand as inflation bites even harder.

Retailers that are forced to cut prices to attract customers could soon start to struggle. For instance Kingfisher, the parent company of B&Q, is highlighted by the Share Centre as one to watch.

"Offers to entice consumers could put a strain on margins," says Nick Raynor, investment adviser at the Share Centre. "The company's update at the beginning of June did note tougher times ahead."

So which companies will withstand the problems of rising inflation? Those that sell items where demand is price inelastic. That means that, even if they increase prices, demand shouldn't fall.

A great example of that is Burberry. It has diversified from raincoats and checked scarves to become a leading and resilient global luxury goods brand, with a strong presence in the quickly-growing market of China.

"Burberry's strong and highly sought-after brand enables it to effectively pass on the impact of rising input costs to its customers via higher prices," says Aruna Karunathilake, manager of Fidelity UK Aggressive fund.

She also picks energy exploration and production company BG Group. "Commodity companies such as BG tend to do well in times of rising inflation, as their real assets keep their value in times of monetary debasement," she says.

Sam Morse, manager of the Fidelity European fund says Nestlé is a great example of a company with significant pricing power.

"It has been successful in creating a collection of brands that consumers like, such as KitKat, Shredded Wheat and Nescafé," he points out. In addition, he says, Nestlé benefits from significant scale advantages to be a low-cost producer.

Tobacco company Swedish Match is another good example, Morse says. The firm manufactures and markets products such as snus/snuff, chewing tobacco, cigars, pipe tobacco, matches and disposable lighters. "Naturally, demand for such products that are associated with an addiction tend to be rather price inelastic," Morse says.

Amit Lodha, portfolio manager, Fidelity Funds Global Real Assets fund, picks engineering company Linde and Australian mining company Iluka Resources. "Linde has pricing power as it has the ability to pass through higher costs through its contracts that it sets with its customers at different stages of the cycle," she says. Iluka, she adds, has leeway to raise prices of the zircon and titanium it mines.