Summary

• Core PCE inflation at 2.9% suggests interest rates may remain high, favouring specific investments.
• Inflation-resistant investments often include firms with strong pricing power to protect profit margins.
• Financial stocks may benefit from higher interest rates through wider net interest margins.
• ETFs can provide a broad hedge against persistent inflation and interest rate volatility.

Still Worried About Inflation? Perhaps You Should Be.

I keep hearing whispers that the great inflation panic is over. That we’ve slain the beast and can all go back to enjoying the cheap money party of the last decade. To which I say, have you looked at the numbers lately? The US Federal Reserve’s favourite little metric, the Core PCE, is stubbornly sitting at 2.9 percent. That’s a country mile from their cosy 2 percent target, and it tells me this story is far from finished.

This isn’t just a tedious statistic for economists to argue over. It’s a signal. It suggests that the central bankers will keep interest rates elevated for longer than many would like. For a lot of businesses, that’s a slow and painful squeeze. But for a select few, it’s a golden opportunity. The trick, as ever, is figuring out which is which.

The Simple Magic of Pricing Power

In times like these, the most valuable asset a company can have isn’t a flashy new technology or a charismatic CEO. It’s something far more fundamental, pricing power. It’s the ability to look your customers in the eye, tell them the price has gone up, and have them pay it without flinching. Think of your favourite coffee shop versus the generic chain. One can nudge its prices up and you’ll grumble but still buy your flat white. The other tries it, and you’ll just walk down the road.

Companies that can pass on rising costs, rather than absorbing them and watching their profits wither, are the ones that could navigate this environment rather well. They have built a moat around their business, whether through a powerful brand, an essential service, or a dominant market position. They don’t just survive inflation, they can make it work for them.

When Higher Rates Are Good News

Nowhere is this clearer than in the financial sector. For years, banks were dreadfully dull investments, crushed by zero-percent interest rates. Now, the tables have turned. Higher rates mean they can charge more for loans whilst the interest they pay out on deposits lags behind. That gap, the net interest margin, is where they make their money. A wider gap could mean healthier profits.

Look at a company like Enova International. It’s a financial technology firm that serves a niche market, and in a high-rate world, its lending spreads can expand quite nicely. Or consider Triumph Financial, which focuses on specialised corners of the market where it can maintain its pricing discipline. These aren’t your typical high street banks, they are specialists who could potentially thrive when money is no longer cheap.

A More Sophisticated Defence

Of course, you don't have to pick individual stocks. For those looking for a broader approach, there are more modern tools available than simply buying gold and hoping for the best. Some exchange traded funds, or ETFs, are built specifically for this climate. The Quadratic Interest Rate Volatility and Inflation Hedge ETF, for instance, is designed to manage the choppy waters of interest rate changes whilst offering a buffer against inflation. This is just one piece of the puzzle, of course. A well-thought-out strategy might involve a collection of assets, something akin to these Inflation-Resistant Investments | Core PCE at 2.9%, which are designed to weather this specific economic climate.

Let’s be clear though, no investment is a sure thing. A prolonged period of high rates could tip the economy into a recession, which is bad for almost everyone. Even the strongest companies might find their customers eventually say enough is enough. And for the banks, the loans that look profitable today could become defaults tomorrow if the economy sours. Investing is always about weighing the potential against the risks, and this environment is no different.

Deep Dive

Market & Opportunity

• Core PCE inflation is at 2.9%, remaining above the Federal Reserve's 2% target.
• This economic environment suggests interest rates will likely stay higher for an extended period.
• Companies with strong pricing power can pass increased costs to consumers, protecting their profit margins.
• Financial institutions can benefit from wider lending spreads in a high-interest-rate environment.

Key Companies

• Quadratic Interest Rate Vltly and Infltn Hdg ETF (IVOL): An exchange-traded fund offering a sophisticated approach to inflation hedging by actively managing interest rate volatility and providing inflation protection.
• Enova International Inc (ENVA): A financial technology company that provides online financial services, benefiting from higher interest rates through expanded lending spreads, particularly within its target market of non-prime consumers.
• Triumph Financial Inc (TFIN): A financial holding company that serves niche markets, allowing it to maintain pricing discipline and potentially benefit from increases in interest rates.

Primary Risk Factors

• Rising interest rates could slow economic growth, potentially leading to a recession.
• Financial institutions face increased credit risk, as higher rates may lead to more loan defaults if economic conditions deteriorate.
• Customers may eventually resist price increases, even from companies with strong pricing power.
• All investments carry risk and you may lose money.

Growth Catalysts

• The persistence of inflation above the 2% target creates a sustained environment where inflation-resistant investments could outperform.
• Financial institutions are positioned to see higher profits from wider net interest margins.
• A structural market shift away from a low-rate environment favours companies that can thrive with higher inflation and interest rates.