On Wednesday, January 29th, Fed Chair Jerome Powell acknowledged the need to “resolve the tension” between high inflation and still-elevated unemployment. Powell went on to say “This is not the situation that we have faced for a very long time and it is one in which there is a tension between our two objectives…Inflation is high and well above target and yet there appears to be slack in the labor market.”
The U.S. is still short 5 million jobs from where it was before the pandemic and facing a continued labor shortage. Compounding that issue, policymakers at the Fed lifted their inflation forecast to 4.2% – more than twice as much as the targeted 2%.
Continued high inflation and low employment is not where we want to be and can have serious ramifications if one of those two catalysts doesn’t ease up. Powell’s hope is that inflation will ease on its own as the global economy returns to normal after the Delta variant threw a wrench in its re-opening. So, now it is a race between stable employment rates and persistent inflation.
If inflation does continue longer than anticipated, there will be a greater impact to stocks. Fortunately, there are stocks that thrive during times of inflation with built in pricing power. Recently UBS listed companies that outperform during periods of inflation. These stocks are primarily large cap companies in the financial, energy and utilities sector.
Here are a few of our favorites on that list
UBS Strategist, Keith Parker went on to say about the list “Following periods of elevated inflation, our quantitative screen of strong pricing power stocks has outperformed weak pricing power stocks by 20% in the subsequent 12 months.”