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How to invest if inflation really is speeding up Add to ...

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The U.S. consumer price index was reported weaker than expected Wednesday, yet a sizable contingent of investors believe that this official inflation measure drastically understates the extent of rising prices. A closer look at industry sector performance suggests the conspiracy theorists might have a point.

S&P 500 Inflation winners: YTD return per cent

SOURCE: Scott Barlow/Bloomberg

S&P 500 Inflation losers: YTD return per cent

SOURCE: Scott Barlow/Bloomberg

We’d expect that if hidden inflation pressures were building in the U.S. economy, the sectors that have historically benefited when prices are rising would be outperforming both the S&P 500 and the inflation losers sectors. Stocks in industries where profits are reduced by inflation should be underperforming the market significantly.

There’s not enough here for a “Eureka! I told you there was inflation” moment. Still, the pattern suggesting rising inflation is there.

The average year-to-date return for the inflation winners (not shown) is 9.6 per cent, 300 basis points higher than the inflation losers. The best performing sector on the tables is railways, which S&P listed as the industry most positively affected by inflation. The worst performer this year, specialty retail, is on the S&P’s inflation loser list.

There’s a limit on how many conclusions can be drawn from these numbers. But each group of sectors can be used as a proven, objective gauge of inflation. Further outperformance by the inflation winners group can be taken as a sign of underlying pricing power.

The inflation winners and losers table can also be used to refine the search for investment ideas. Investors convinced of rising inflation can focus investment research on the sectors from the first table that benefit from rising rates. Those expecting U.S. growth to disappoint again, can look for a rebound in the inflation losers group.

Follow Scott Barlow on Twitter @SBarlow_ROB.

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