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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.
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.
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.
|Stocks that do well with inflation||Stocks that do poorly with inflation|
Inflation is happening for a number of reasons. Here are a few of the core ones:
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.
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