Tuesday’s U.S. Consumer Price Index (CPI) inflation report showed inflation rising faster than expected in January. The cost of housing increased by 0.6%, indicating underlying inflation pressures remain strong. Investors had been pricing the Federal Reserve (Fed) to cut interest rates in May, but that has been postponed to June following the release. The hawkish inflation figures saw the Dow Jones Industrial Average (DJIA) recording its worst day since March 2023 and the Russell 2000 shedding 4%. That happened as U.S. bond yields climbed to 4.32% and major technology stocks took a hit.
The CPI reaction reveals just how sensitive stock prices can be to inflation, with higher prices diminishing consumers’ spending power, lowering demand and adversely hurting most companies. With inflation on the rise, it is more likely the Fed will keep interest rates high for an extended period, posing challenges to stock valuations in the context of increased borrowing costs. Therefore, when buying inflation-proof stocks, one must examine factors related to demand-side economics and monetary policies.
Specifically, some businesses can benefit in a high-inflation environment, such as discount grocery stores that attract customers looking for bargains. Companies offering critical services, like those in the utility sector, can more easily pass on increased costs to consumers.
After the inflation report on Tuesday exceeded expectations, here’s a list of three inflation-proof stocks deemed resilient in the face of rising prices.
CF Industries (CF)
CF Industries (NYSE:CF), a U.S. fertilizer company, stands to benefit from record-high fertilizer prices. The company’s supply chain is currently affected by sanctions on Russia and disturbances due to the conflict in Ukraine. The situation is further aggravated by trade disruptions and higher transport costs stemming from the crisis in the Red Sea area. Notably, fertilizer supplies were tight even before these geopolitical events took place, suggesting that price pressures may remain elevated.
CF boasts a low price-to-earnings (PE) ratio of just 7.2x, coupled with an attractive dividend yield of 2.6%. That compares favorably to the average PE ratio of 27.3x for the S&P 500. As a sign of solid financial health, the company recently announced a 25% increase in its dividend. Consequently, it emerges as an attractive inflation-proof stock more likely to perform in periods of high inflation.
Merck (MRK)
As a major pharmaceutical company developing drugs to treat cancer and other diseases, Merck (NYSE:MRK) generates substantial revenue from its shingles vaccine. Analysts expect the company’s earnings to increase by a substantial 180% this year as the healthcare sector continues its post-pandemic recovery.
All 21 analysts tracking Merck stock recommend a Hold rating or higher. The average target price sits at $133.78 per share, well above the current $125. MRK appears well-positioned as an inflation-proof stock with solid fundamentals and analyst support.
AT&T (T)
The telecommunications giant AT&T (NYSE:T) has faced pressure partly due to high debt levels in recent times. However, through aggressive debt repayment, it has substantially reduced leverage over the past year despite rising interest rates. The company continues to report steadily growing revenue and forecasts that free cash flow will be more than sufficient to cover its dividend payments.
AT&T trades on a low PE ratio of just 8.6x, way below the average 28x of the telecom sector. Remarkably, it still offers an attractive dividend yield of 6.6%, even after reducing its payout two years ago to focus on debt repayment. Analysts have a consensus target price of $19.35 per share, indicating further upside. AT&T stands out as another inflation-proof stock.
On the date of publication, Stavros Tousios did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
