It's no secret that inflation was one of the biggest concerns for investors over the 2022 investing year.
Rising inflation, as well as the higher interest rates that come with it, have shaken markets over the past 12 months and are probably almost single-handedly responsible for the sluggish performance we saw on the stock markets last year.
That was true for both here on the ASX and overseas on the US markets.
And while inflation might ease this year, it's likely that it won't be getting down to the passive levels that were ubiquitous for the decade preceding 2022.
So how does an investor put $1,000 to work if they are concerned about rising inflation?
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Investing $1,000 in a high-inflation world
Well, there are a few things to keep in mind. Inflation is the process of currency debasement. In other words, high inflation rates make our dollar weaker. This increases the cost of pretty much everything. And if wages don't keep up (which they haven't been), it results in a falling standard of living for most Australians.
So what does this mean for ASX shares? Well, it means that the bar for providing real returns is higher. If inflation is running at 6% per annum, and an ASX share gives an investor a 2% dividend yield alongside a 3% capital appreciation, then it is still going backwards.
That's because although its nominal rate of return is 5%, its actual rate of return (accounting for inflation ) is -1%.
So with this in mind, I would aim for ASX 200 shares that have the potential to provide both a mix of capital growth and dividend returns. Preferably with franking credits too, which boost returns even further. Potential candidates for these criteria could include Brickworks Ltd (ASX: BKW) or Washington H. Soul Pattinson and Co Ltd (ASX: SOL).
Shares that can thrive with rising prices
But I would also look to companies that have a structural advantage in times of high inflation. One option is ASX 200 bank shares like Westpac Banking Corp (ASX: WBC). Banks can quite quickly adapt to higher inflation because they can simply raise their loan rates alongside rising interest rates.
Higher customer rates on term deposits and savings accounts that stem from higher interest rates can boost the capital that banks have at their disposal too.
Another sector that tends to prosper during high inflation periods is ASX 200 resources shares. Commodities like iron ore, coal, gold and oil tend to keep up with, or even exceed, the rate of inflation.
Thus, miners like BHP Group Ltd (ASX: BHP) and drillers like Woodside Energy Group Ltd (ASX: WDS) could also be potential inflation winners. Just look at the share prices of BHP or Woodside over 2022 if you want proof that these companies can thrive when prices are rising.
Finally, consumer staples shares are in another sector with a reputation for being an effective inflation hedge. Higher inflation can reduce consumer spending.
But we all have to spend money on food, drinks and household essentials, pretty much regardless of how expensive they are. So another potential path for our $1,000 is in ASX 200 consumer staples shares like Coles Group Ltd (ASX: COL) or Metcash Ltd (ASX: MTS).
