How to Find the Best Stocks for Inflation

High inflation hurts investors in a couple of different ways, according to financial advisors. But it also affects some stocks less than others, and it can even be good for certain sectors of the market.

Here’s what advisors say about investing during periods of high inflation, and how to find the best stocks for inflation.

How does inflation affect stocks?

Advisors say that excessive inflation has two major effects on investors: It reduces the value of their money over time, and it motivates the Federal Reserve to take counter-inflationary actions — like interest rate increases — which can push down stock and bond prices.

“Let’s say you have money in the bank, sitting in cash, and let’s say inflation is at 3% to 6% — you’re losing 3% to 6% every single year,” says Angela Moore, an Orlando, Florida-based certified financial planner and the founder of Modern Money Education.

“Let’s say inflation is at 6%, and your investments are only making 4% — you’re still losing money," says Moore.

Satoru Asato, a Bloomington, Minnesota-based certified financial planner with McNellis & Asato, says that “monetary policy is shifting from easy mode to tightening mode,” referring to the Federal Reserve’s seven interest rate hikes in 2022.

And in a rising interest rate environment, “as we’ve seen, prices of bonds and stocks go down," Asato says.

The S&P 500 index fell more than 20% in 2022, while the S&P 500 bond index fell more than 14%.

How to find stocks that do well in inflation

Moore and Asato both say that certain sectors — and certain types of stocks — do better than others during inflationary periods.

Energy stocks

Asato says the energy sector is a good place to look for inflation-resistant stocks.

“When Russia invaded Ukraine, prices of food and oil went up. And as the price of gas at the pumps increased, you saw the oil companies do well,” he says.

Even when oil prices are high, consumers still need gas and buy it, sometimes choosing to cut spending in other areas.

A 2022 study by mutual fund issuer Hartford Funds analyzed stock returns for every year between 1973 and 2021 in which inflation was higher than 3%. The study — "Which Equity Sectors Can Combat Higher Inflation?" — found that energy was the best-performing sector in those high-inflation years.^[0]

Income-producing investments

Moore says investors should also consider income-producing investments such as real estate or dividend stocks.

Real estate investment trusts, or REITs — which invest in rental properties — can provide extra income, as REITs are required to distribute dividends to shareholders. Dividend stocks also give investors a portion of a company’s earnings on a regular basis.

“The income portion is usually more consistent than the market fluctuations,” Moore says.

The Hartford Funds study supports the real estate idea. It found that rental REITs were the second-best-performing stocks during high-inflation years, after energy stocks.

Value stocks

Value stocks — for example, certain insurance stocks — also seem to be faring better than most right now, says Asato.

Some insurance companies with lower-than-average PE ratios had positive returns in 2022, while the S&P 500 fell more than 15%.

Inflation-protected investments

There are some investments that are specifically designed to provide inflation protection, such as Treasury Inflation-Protected Securities and inflation-protected bond funds.

TIPS try to stay ahead of inflation by having their principal value adjusted every six months based on changes in the CPI. Inflation-protected bond funds use trading strategies to target returns that are at least equal to the inflation rate.

“In an inflation-protected bond portfolio, for example, the fund managers are buying and selling bonds based on current inflation rates, to basically keep up with the inflation rate. So they’re actively managing it to attack that problem,” Moore says.

Are there any truly inflation-proof stocks?

No, says Moore. There are no guaranteed inflation-proof investments — even among inflation-protected securities and funds.

“When we’re talking about investments, we never use the word ‘guaranteed,’” she says.

“The portfolio managers who manage [inflation-protected] strategies, they’re aiming to hit a certain target, but at the end of the day, they don’t control the market.”

» Learn more: Hyperinflation

How diversification can protect you from inflation

However, there is a way for investors to protect themselves against an inflation-related stock market downturn. One of the best ways to do that, according to Moore and Asato, is diversification.

“If you’re someone who has some exposure to alternative investments … that have low correlation to the stock market, that’s helpful,” says Moore.

Asato says investors who hold a variety of assets may be better equipped for a post-downturn recovery.