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Inflation doesn’t want to go away—and the stock market is reeling. Some stocks, though, could benefit if inflation remains sticky. 

Investors got a shock Tuesday, when August’s consumer price index hit the wires. It showed prices had gained 8.3% year over year, beating expectations for 8.1%. While that’s the second consecutive month in which the rate of price increases declined, while core CPI, which excludes food and energy, rose 6.3%, topping forecasts for 6.1%.

That sent the stock market tumbling. The

S&P 500
fell 34.3%, while the

Dow Jones Industrial Average
dropped 1,276.37 points, or 3.9%, and the

Nasdaq Composite
slumped 5.2%.

It’s not difficult to see why markets might not like inflation. Rising costs hurt companies’ profit margins, while price increases can hurt consumer demand. But the real fear is that the Federal Reserve will have to lift interest rates even higher as it tries to tamp down demand to fight inflation.

The good news is that there are some stocks that can still benefit from inflation. MSCI’s inflation-exposed portfolio has outperformed the MSCI USA Index since inflation became prevalent in the first half of 2021. The heaviest weightings in that portfolio are stocks in the energy, materials, and industrials sectors, sectors that have outperformed this year.

Oil has been a poster child for the inflation play in the equity market. The 

Energy Select Sector SPDR ETF
(XLE), which contains oil producers and pipeline providers, has gained 31% for the year. The MSCI USA, meanwhile, has dropped over 14%. Some of the widespread inflation has been caused by the rise in oil and gas prices, which has boosted the profits of producers.

The materials sector has benefited from strong pricing, too. Nucor (NUE), a steel manufacturer and constituent of the 

Materials Select Sector SPDR ETF
(NUE), has gained 21% this year. The company said on its most recent earnings call that it has increased prices aggressively, enough for analysts to forecast sales growth of 16%, to $42.3 billion, in 2022, according to FactSet. While the company’s gross margin should decline by about a percentage point year-over-year as costs rise, operating profit should still grow by 18%. 

Some industrial stock, too, should also get a boost from higher prices. Shares of

Deere & Co
.
(DE), a manufacturer of farm vehicles, have gained 8% this year. Its products are premium enough to allow the company to lift prices without losing customers. That’s just what the company has done, as analysts expect 2022 sales to grow 17% to $47.9 billion and for the gross margin to expand. 

There’s one caveat, though. With all of this inflation spurring higher interest rates, the economy could endure enough demand destruction that volumes of products and prices could take a hit. That’s why the vast majority of stocks in the S&P 500, according to FactSet, were getting hit Tuesday. And that includes the stocks mentioned above. The silver lining is that those stocks still have the best shot at using inflation to keep their earnings more stable than other companies can. 

At the very least, they could outperform the market—even if they fall. 

Write to Jacob Sonenshine at [email protected]