This morning (26 March) UK inflation knowledge for February got here out. It revealed a shock fall from 3% final month to 2.8%, giving a lift to the FTSE 100 and FTSE 250 within the morning. But this knowledge and the implications will trigger totally different reactions for some sectors and FTSE shares. Right here is one which I feel might do properly, alongside one that might battle.

Boosting revenue margins

Tesco (LSE:TSCO) is one firm that might actually profit from inflation trending again decrease in coming months. One of many key parts that goes into the buyer price index for inflation is groceries and different on a regular basis items that Tesco inventory. The shop’s prospects are delicate to rising costs. Consequently, when inflation may be very excessive, Tesco experiences decrease demand. This was one thing that we noticed throughout 2022, when it climbed above 10%.

However, a part of the 12% share price rally within the final yr has come as inflation has proven indicators of being again beneath management. The 2024 annual outcomes talked about how the web concern about inflation from prospects is now down to 50% from 70% initially of the
yr.

From a monetary perspective, the report spoke a couple of give attention to rising absolute income whereas sustaining margins. A technique it’s looking for to do that is by “targeting productivity initiatives that at least offset inflation in the medium term”. This reveals me that the enterprise has learnt from the issues attributable to rising costs again in 2022 and is taking steps to handle this in case inflation rises in coming years.

One danger is the powerful competitors on this sector. Grocery store chains have skinny revenue margins at the very best of occasions, so any value enhance might flip the enterprise from a revenue to loss.

Strain on pricing

Nationwide Grid (LSE:NG) is a agency that might battle with low inflation. This would possibly sound odd, however hear me out. As an vitality utility firm, Nationwide Grid’s revenues are sometimes linked to inflation via regulated price controls. Decrease inflation can result in decreased allowable price will increase, probably impacting income progress and profitability.

Again when inflation was surging in 2022, vitality corporations like Nationwide Grid got here beneath strain from some who believed the companies made extra income as a part of passing the upper prices onto prospects. This wasn’t unlawful and was inside the Ofgem price management frameworks. However it definitely helped Nationwide Grid financially.

The flipside may be true if inflation retains falling. With out a lot wiggle room on price will increase, Nationwide Grid might see income stagnate. After all, a danger to this pessimistic view is that income might develop organically. If the enterprise can get pleasure from a profitable advertising marketing campaign or buyer acquisition push, income might develop that manner as an alternative.

The inventory is down a modest 2% up to now yr, with a dividend yield of 5.84%.

On stability, I’m staying away from Nationwide Grid proper now however really feel buyers would possibly wish to think about Tesco inventory as an inflation thought for a portfolio.