Which are the Stocks that benefit from inflation the most? Here are 3 sectors to watch

Stocks that benefit from inflation do exist, but they might not be immediately obvious to find.

After all, inflation can be a tricky economic phenomenon. It can have both beneficial and detrimental effects on various aspects of the economy, including investments. And even companies you think might benefit may not actually benefit from inflation.

Stocks Down Under recaps the stocks that benefit from inflation the most.

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The stocks that benefit from inflation belong to similar sectors

Some sectors respond to inflation better than others. You’ll generally find the stocks that benefit from inflation in similar (if not the same) sectors.

We note three in particular.

1. Commodities and energy stocks

Generally speaking, stocks that benefit from inflation are those with more exposure to commodity prices, such as energy companies or producers of heavy industry materials.

These types of companies tend to benefit from rising prices due to their ability to raise their own selling prices in tandem with inflationary pressures.

This is especially true for companies engaged in mining and drilling operations, since these activities typically involve higher costs associated with labor and physical resources. As these costs rise, so does the revenues generated by these companies.

Hence, if inflation is high then it tends to be a boon for commodity-producing stocks that are able to keep up with rising expenses. If a commodity in hot demand, customers will pay a premium for it.

So it includes oil giants from ExxonMobil and Chevron on Wall St to Woodside and Ampol in Australia. But it also benefits companies that provide chemicals, construction materials and metals. So examples include companies such as Dyno Nobel, Maas Group, Orica and Calix.

2. Financial service providers

Besides commodities, another sector that hosts many stocks that benefit from inflation is the financial services sector. Obviously this captures Big 4 Banks and Macquarie. And let’s not forget smaller lenders like Judo Bank (ASX:JDO) and Pepper Money (ASX:PPM).

Since the cost of borrowing increases along with the rate of inflation, lenders tend to charge higher interest rates in order to maximise profits.

This can translate into larger profits for banks and other financial institutions who lend money at higher rates during times of elevated inflation levels.

The flip side of this argument is that financial service providers have to pay higher interest on their funding sources and on customer deposits. And this is why the banks’ NIMs didn’t spike to the same extent that a tripling in some banks’ interest rates would imply.

3. Staple consumer goods

Consumer stocks are categorised by the Global Industry Classification Standard as being a staple or discretionary.

Stocks that sell consumer staples, such as groceries and discount retail, may benefit from higher rates of inflation since people are likely to look for bargains. Australia’s supermarket duopoly – Coles and Woolworths – fits here as does Wesfarmers (ASX:WES) and arguably Metcash (ASX:MTS).

Moreover, companies producing these products stand an opportunity for increased sales when there is a surge in demand due to inflationary conditions in the market. One example would be Inghams (ASX:ING), but Australia’s largest chicken provider also goes to show that this is no guarantee.

 Stocks that benefit from inflation have pricing power

To summarise, any stock with pricing power in the market will generally profit more when there is a spike in inflationary pressure.

We have observed that this includes commodities, financial services and consumer staples. Consumers will need these services regardless of economic conditions.

However, they will be hunting for bargains and so it is important that these firms can deliver value for money. This is where good management makes a difference.