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If you’ve spent money or watched the news, you’ve probably noticed that inflation is skyrocketing. Prices for housing, consumer goods and daily essentials are quickly increasing. At the same time, the Federal Reserve is increasing interest rates in an attempt to bring down prices. All of this has implications for your investments. Find out which stocks and sectors are impacted by rising inflation, and learn more about the best inflation stocks to buy.
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Best stocks for inflation divided by sector
1. Energy sector
Energy companies benefit from high inflation because it leads to high prices for commodities such as oil, gas and even renewable energy. As consumers pay more for energy, this influx of cash drives share prices up for energy companies. This is why energy stocks are one of the best stocks for inflation.
Financial institutions perform well when interest rates go up. As the Federal Reserve raises interest rates to counter rising inflation, banks and other financial institutions can benefit from a higher return on borrowed money. This is why financial sector stocks can be some of the best inflation stocks to buy.
Real estate investment trusts (REITS) can be some of the best stocks for inflation. These trusts are companies that own or operate properties such as apartment buildings, office spaces, shopping malls and warehouses. As housing costs rise due to inflation, these companies can increase rents and pay out higher dividends to their shareholders.
Companies in the consumer staples sector produce or sell goods or services that are always in demand. These can include products such as food, drinks, household goods, hygiene products, alcohol and tobacco. These companies represent some of the best stocks for inflation because they can increase their prices during inflationary periods and still make a high volume of sales.
Inflation can cause stock prices to go up or down, depending on the industry. Stocks that are positively affected by rising inflation are usually for products and services that people need to buy despite high prices (such as housing, utilities and food). The sectors that tend to suffer are those that are non-essential and lose money as consumers reign in spending.
How inflation affects interest rates
The Federal Reserve increases interest rates to try to reduce inflation. Higher interest rates encourage people to save money instead of borrowing and spending money (which drives up prices). As consumers spend less, companies have to lower their prices or at least raise them more slowly to encourage demand.
What stocks do well with inflation, and which do poorly?
Stocks that do well with inflation
Stocks that do poorly with inflation
Energy
Utilities
Financial companies
Real estate investment trusts
Consumer staples
Emerging markets
Technology
Telecoms
Transportation
Consumer discretionary (non-essentials)
Emerging market fixed income
Investment grade fixed income
What is causing inflation?
Inflation is happening for a number of reasons. Here are a few of the core ones:
Supply chain issues. COVID-19 and the war in Ukraine have caused labor shortages, supply shortages and shipping constraints in many industries. When products and services are harder to get, people are willing to pay more for them, which drives the price up.
Increased demand. As the economy opens up, there is an increase in demand for goods and services which are in short supply, driving up prices across the board.
Labor shortages. The pandemic has resulted in labor shortages for key services and industries. These shortages are driving up wages, an expense that is often passed on to consumers through higher prices for goods and services.
Reduced output of resources. There is reduced output for some products such as wheat and gas due to factors like climate change and global conflict. This is driving up prices for certain types of goods which are in shorter supply than usual.
What about dividend stocks?
Dividend stocks are seen as a strong strategy to protect against inflation since they pay out profits right away and they tend to offer higher returns than certificates of deposit (CDs), bonds or term deposits. You may also get preferential tax treatment by investing in dividends when compared with interest income from other types of investments. Just be aware that dividend-paying inflation stocks carry more risk than CDs, bonds or term deposits. Companies can unexpectedly cut dividends to shareholders if they need to infuse cash into the business to keep it afloat, and you may end up with less in your pocket as a result. How dividend stocks work
Bottom Line
Inflation is growing, and interest rates are going up at the same time.
Some stocks perform well with inflation while others should be avoided. The best stocks for inflation are in sectors such as energy, utilities, real estate and consumer goods.
Aside from sector-specific stocks, dividend stocks can be used to counter inflation.
Open a trading account to invest in the best inflation stocks
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Frequently asked questions
You may want to invest in inflation stocks to preserve your portfolio's value and to keep your savings growing. Investing in inflation stocks can also help you to diversify your portfolio, which will create more balance during times of upheaval.
One of the best ways to determine the best stocks for inflation is to figure out if the product or service is essential. For example, people will need to purchase staples such as food, housing and energy commodities no matter the price. Products and services that are less essential, such as air transportation and new technology, are less likely to perform well.
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Finder is not an adviser or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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