Should you invest in stocks during inflation?

Investing in stocks during inflation can be a smart move if done strategically and with careful consideration of the potential risks and rewards. 

According to an analysis of data back to the 1920s by BlackRock, one of the world’s largest fund managers, equities perform well as long as inflation isn’t out of control ― over 10% for a longer period. In above-average inflation environments, when the annual inflation rate is between 5-10%, so-called value stocks have performed particularly well.

You should be aware that inflation can have both positive and negative effects on the stock market. On the one hand, companies may be able to raise their prices and thus boost their profits during inflation, leading to higher stock prices. On the other hand, inflation can also lead to higher interest rates, which can make stocks less attractive.

You should also consider your investment goals, risk tolerance, and time horizon when deciding which assets to invest in. We have put together an asset compass tool that helps as a guide in just such cases, where you can get personalized recommendations on what investment options may be best in certain scenarios, for example to fight inflation.

Stocks that tend to perform well during high inflation periods are ones where investors believe that the current price of the stock does not adequately reflect the true value of the company. These are usually referred to as value stocks, and their appeal to investors lies in the confidence that the company will be able to generate solid sales and earnings even in tougher economic conditions, like high inflation.

Value stocks also typically pay high dividends. Fidelity Investments has recommended buying stocks that increase their dividends during periods of high inflation, pointing out that such stocks tend on average to outperform the broad market considerably. 

Values stocks are generally contrasted with growth stocks, which are usually priced higher due to their higher percieved growth potential. However, they don't typically pay dividends, choosing to reinvest their profits instead to fuel high growth.

Historically, value stocks have tended to perform better than growth stocks during periods of high inflation, while growth stocks generally perform better when inflation is low.

Sectors that have weathered high inflation well in the past include energy, health care and financials. Companies that produce consumer staples like food, beverages and household products also tend to perform well during inflation as demand for these items remains relatively stable. Real estate stocks may present another good option during inflation, driven by rising property prices and rent.

As mentioned above, some stocks can do well in periods of high inflation, but there are also certain types of stocks that tend to perform worse than others during inflationary periods.

While value stocks are generally put into the first group, growth stocks are the ones that tend to perform more poorly during times of inflation. These types of stocks represent companies valued for their earnings potential, and they may struggle during periods of inflation as investors tend to become more cautious and focus instead on more stable and established companies.

Some other types of stocks that may not do as well in periods of inflation include utility stocks such as electricity or gas companies (higher fuel prices can reduce their margins) and stocks of companies selling non-essential items such as luxury goods, travel and entertainment (areas where consumers usually cut back their spending in times of inflation).

However, these are merely the general trends – you may always be able to find individual stocks within any sector that perform much better than their peers, even during inflation, depending on their specific business model, financial health and management.

If you're interest in investing in stocks, for example as a way to protect your money against inflation, make sure to read our detailed guide on how to buy shares. The process involves making a plan, finding the right broker, opening an account and funding it.

For a list of the top recommended brokers for stock investment, a good way to start is by checking out our latest lists of the best brokers for stock investment, the best discount brokers, or, if you're new to stock investing, our choices for the best brokers for beginners.

In the latter case, you should also check out our step-by-step guide for opening your first broker account and buying your first stock.