Two FTSE 100 index shares to combat higher inflation?

FTSE 100 index shares BHP (LON: BHP) and Polymetal (LON: POLY) could offer a degree of protection from higher inflation. It reached its highest level for three years in June. The 2.5% reading was driven by an economic reopening as lockdown measures abated.

With the UK economy set to grow by 7% this year and the world economy on course for a 6% growth rate, commodity stocks could become increasingly appealing should inflation remain at elevated levels. A history of rising commodity prices in response to higher demand during periods of economic expansion could make Polymetal and BHP relatively attractive.

Polymetal

Gold has a long history as an inflation hedge. Its status as a store of wealth could mean its price remains buoyant following its 17% rise since the start of 2020. This could benefit gold miner Polymetal’s financial performance and long-term share price prospects.

Its recent first-half production update confirmed it is on track to meet full-year production guidance. It also reported tight cost control that means it expects to have all-in sustaining cost of $925-$975 per gold equivalent ounce in the full year. This is significantly lower than the current gold price of $1,815 per ounce. Meanwhile, its construction and development activities moved along as expected in the first half of the year.

Clearly, the company faces risks such as a rising incidence of Covid-19 cases in Russia and Kazakhstan. Moreover, a falling gold price would negatively impact on its financial prospects, while foreign exchange changes could work for or against its profitability.

However, with a price/earnings ratio of around 9.5 and a dividend yield of nearly 6%, it appears to offer a margin of safety in a richly-valued stock market. Furthermore, gold may offer some defensive appeal should the economic recovery from Covid-19 prove to be less emphatic than many economists are expecting.

BHP

BHP’s share price has delivered just over twice the FTSE 100 index’s 17% return in the past year. The company’s exposure to a wide range of commodities, including oil, iron ore and copper means its performance may be positively impacted by a rapidly growing global economy.

Indeed, an expectation of rising demand for a range of commodities is forecast to lead to a 20% annualised increase in the company’s earnings per share between 2020 and 2023. Its forward P/E ratio of 12 suggests that a double-digit rate of profit growth has not yet been factored in by investors.

BHP also appears to have a robust balance sheet that benefits from having a relatively modest net debt-to-equity ratio of 22%. Its wide range of high-quality assets also mean it may be less susceptible to challenges in one segment of the commodity market versus pure-play peers.

The firm has a forward yield of 8.8% after announcing a record half-year dividend. Although its financial prospects may be harmed by further Covid-19 challenges or a sluggish economic recovery, its low valuation, income potential and capacity to provide a degree of inflation protection could make it a relatively appealing purchase.