Inflation in the U.S. hit fresh 40-year highs, with the consumer price index (CPI) published by the Bureau of Labor Statistics rising by 7.9% in February compared to a year ago, marginally ahead of expectations. This marks an increase from the 7.5% inflation rate seen in January. On a month-over-month basis, the CPI rose 0.8%. Supply constraints, a tight labor market, and strong demand following the Covid lockdowns have been driving prices higher in recent quarters and last month’s CPI figures were driven primarily by higher gasoline, food, and housing costs. It’s likely that the March numbers will be still higher, as the war between Russia and Ukraine has resulted in surging energy and commodity prices. For example, WTI crude prices are up by almost 20% over the last month, trading at over $105 per barrel, after briefly touching about $130 per barrel. With inflation surging, the U.S. Federal Reserve is likely to gradually begin raising interest rates at its meeting next week, as it looks to keep the price rise under control. A 0.25% rate hike is widely expected, to begin with.
Now the broader stock markets have fared badly this year, with the S&P 500 down by 10% and the tech-heavy Nasdaq-100 down by close to 18%, considering surging inflation, the ongoing war, and the prospect of multiple rate hikes. However, our theme of Inflation Stocks – which predominantly includes companies from the banking, insurance, consumer staples, and energy sector – has outperformed considerably, rising by about 8% year-to-date. We think this theme could continue to outperform in the near term as well, for a couple of reasons. Firstly, with the Federal Reserve planning multiple rate hikes this year, banking and insurance stocks in the theme could potentially see stronger interest income on their loans and cash holdings. Energy stocks stand to gain from rising oil and gas prices and potentially as the U.S. looks to bolster domestic production following its ban on hydrocarbon imports from Russia. Although consumer staples stocks haven’t exactly fared well this year, they will be in a better position to pass on higher input costs to customers, potentially helping them fare a bit better than the broader market going forward.
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Within our theme, Chevron stock (NYSE:CVX) has been the strongest performer, rising by 43% year-to-date in 2022. Exxon Mobil stock (NYSE: XOM) has also done very well, rising by 34% year-to-date. On the other side, Procter & Gamble (NYSE:PG) and PepsiCo (NYSE:PEP) have been the weakest performers, with both stocks down by roughly 6% thus far in 2022.
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|S&P 500 Return||-3%||-11%||90%|
|Trefis MS Portfolio Return||-3%||-13%||243%|
 Month-to-date and year-to-date as of 3/11/2022
 Cumulative total returns since the end of 2016