4 Sectors That Thrive When Inflation Runs Hot

Key Points

• The PCE index is expected to show inflation will continue to be a concern for investors in 2025.
• Defensive stocks are a good place to look in a flight to safety and security.
• Biopharmaceuticals, consumer staples, utilities, and metals and mining are four sectors to consider.

On February 28, investors will get the January reading of the Personal Consumption Expenditure (PCE) index. Spoiler alert: it's expected to show inflation continues to run hot. While many investors may decide to flee stocks altogether during times of inflation, there are opportunities to own stocks in sectors that profit during inflation.

I’ll get to those sectors to consider in a moment. But before I do, it’s important to understand what’s going on with inflation. The PCE number is likely to confirm the readings from last month’s Consumer Price Index (CPI) and Producer Price Index (PPI). That is, rather than moving closer to the Federal Reserve’s preferred target, inflation numbers are likely to move higher. 

In fact, according to the Conference Board, U.S. consumers now expect inflation over the next 12 months to increase to 6% from a prior reading of 5.2%. You can tell investors to put emotions aside, but if you shop for groceries, you know prices aren’t going down. And it’s only natural to be concerned about the potential impact of tariffs on the prices of groceries, as well as durable goods. 

Higher-for-Longer Impacts Interest Rates as Well as Inflation

Another concern weighing on stocks is the direction of interest rates. Interest rates rose sharply in 2022 and 2023, partly as a measure to curb surging inflation. Not surprisingly, stocks began to rally at the end of 2024 on hopes of multiple rate cuts in 2025. But sticky inflation makes it improbable that the Federal Reserve will cut rates until later this year. In fact, there are whispers that the Fed could have to increase rates again.

You’re seeing that impact in some of the leading technology stocks that are dropping over concerns about the impact of higher borrowing costs on bottom lines. If that spending drops for a sector like artificial intelligence (AI), the sell-off may become more severe.

The question is if that money that’s coming out of technology stocks will stay on the sidelines or rotate into other sectors. There’s some evidence that this is taking place, and here may be the sectors to watch. 

It’s Time to Get Defensive

A common theme of these sectors is that they’re all defensive in nature. That means that the companies provide products and services that consumers and businesses need regardless of the state of the economy. These companies also generally have strong balance sheets and pricing power, which helps them deliver solid earnings growth. These companies also use a portion of those earnings to reward shareholders with dividends. 

This makes defensive stocks a favorite of buy-and-hold investors. But buy-and-hold investing has been scorned during the last decade or more because of low interest rates. Why should you play it safe with single-digit earnings growth when there are a number of growth stocks delivering market-beating returns?

However, high inflation is making buy-and-hold stocks worth a closer look as investors prioritize safety and stability. That’s what the following stock sectors can provide.

Biopharmaceuticals: Blue-Chip Biopharma Stocks Provide Value and Growth Potential

The biopharmaceutical sector is divided into two camps. There are small-cap names that, in many cases, are like lottery tickets. They have no drugs on the market, are generating little to no revenue and are not profitable. But they entice investors with the opportunity of having the next blockbuster drug. However, many of these companies are not good investments when inflation and interest rates are on the rise.

On the other hand, there are many blue-chip biopharma stocks that are excellent choices for value investors.

Names like AbbVie Inc. NYSE: ABBV and Merck & Co. Inc. NYSE: MRK have a number of commercially available drugs that provide solid revenue and earnings.

Plus, they have deep pipelines that ensure future growth. 

If fund investing is more your style, there are many funds to choose from such as the iShares Biotechnology ETF NASDAQ: IBB.

However, you’ll want to make sure you consider the companies in the fund’s holdings to ensure they match your risk tolerance.

Why Consumer Staples Stocks Thrive in Inflationary Environments

Yes, consumer staples. Many names in this sector are underperforming in the market, but that’s likely to change in 2025.

That’s why investors can look for names like PepsiCo Inc. NASDAQ: PEP and Mondelez International Inc. NASDAQ: MDLZ.

Two shared attributes of these companies are pricing power, which helps their bottom lines, and reliable and growing dividends.

If snack food stocks make you uncomfortable in the GLP-1 era, you can also consider names like Procter & Gamble Co. NYSE: PG or Kimberly-Clark Corp. NYSE: KMB, which share the same attributes.

Utilities Provide Reliable Dividends and Inflation Protection

Energy stocks may still be a tricky investment in 2025, particularly if you’re considering an investment in oil stocks.

But that still doesn’t mean you should stay away from utilities stocks.

Consumers and businesses still need to keep the power on, and that’s why these businesses are reliable performers.

As with many things, location matters when it comes to utility stocks.

One name to consider is NextEra Energy Inc. NYSE: NEE, a company that services Southwestern Florida.

Why Metals and Mining Stocks Belong in an Inflation-Proof Portfolio

Gold is a reliable hedge against inflation. That’s one reason it’s been one of the best-performing asset classes in the last 12 months.

That growth is expected to continue in 2025, which means that metal and mining stocks should perform well.

Demand for copper is also expected to surge over the next five years due to the need for more data centers as well as to modernize our current electrical grid.

And don’t forget about silver, which some analysts believe may outperform gold on a percentage basis.

Newmont Corp. NYSE: NEM and Freeport-McMoRan Inc. NYSE: FCX are two blue-chip names to consider if you want indirect exposure to precious metals in your portfolio.