Soaring inflation is something that many people have never experienced. But the risk of such an unsettling period returning is climbing. Right now, I’m looking for the best shares to buy to battle inflation. But before I do that, let me explain why it’s such a big issue.
On average, prices in the UK rose by 5.5% last month. And the Bank of England warned that inflation could climb above 7% this year. Prices are rising for several reasons that have hit global economies at around the same time. One of the main culprits is the global price of energy. Also, supply shortages across various industries and increased labour costs make it more expensive for companies to produce. Some firms can pass on these costs to customers in the form of higher prices. However, those that don’t have enough pricing power may have to absorb the extra costs, which reduces their profits.
Best shares: the energy sector
So I’d like to buy the best shares that are well-placed to manage this crisis. I’d start with energy companies like BP and Shell. I reckon both FTSE 100 energy shares should perform well if oil prices keep climbing. The price of crude oil is already up by over 20% this year. This follows a 50% gain in 2021. Some of the gain can be explained by growing tensions between Russia and Ukraine. But much can be attributed to an economic recovery post-pandemic restrictions.
Oil prices could remain volatile, which could feed into both share prices. Considering their ability to keep up with rising costs, it’s a risk I’m willing to take. Earnings are rising at both companies, as are dividends. That’s a real plus point for me. Both BP and Shell offer a 4% dividend yield. That’s not the greatest among Footsie dividend shares, but I reckon it’s relatively stable and reliable.
Commodities boom on the way?
Commodities tend to perform well during times of high inflation. That’s why I’d consider buying FTSE 100 miner Rio Tinto (LSE:RIO). Some 66% of its sales come from iron ore, and I reckon Rio’s share price is likely to keep pace with rising commodity prices. Rio is a profitable and cash-generative miner.
On Wednesday it reported underlying earnings for 2021 of $21.4bn. That’s a gain of 72% from the previous year, helped by higher iron ore prices and strong demand from China. It also declared a whopping $10.40 per share in dividends. That gives it a phenomenal 13.5% yield. That’s one of the highest in the FTSE 100. Bear in mind that also includes special dividends and yields this high tend not to be sustainable over long periods.
Miners like Rio are cyclical and there will come a point when the market cycle turns down and its current fortunes may grow slower or even fall. I think we are a long way from that happening, so for now I’m happy to be a buyer.
