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Core Inflation Picks Up to a 10-Year High: 5 Winners

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Cost of living for Americans rose in July at the fastest pace in a decade, indicating a strong U.S. economy and tighter labor market. Shelter costs gave a big boost to results, implying that the Fed's gradual interest rate hike will be on track.

Banks and insurance companies stand to gain from steady interest rate hikes. In the present inflationary environment, investors can also buy real estate and gold which increase in value at a rate higher than the rate of inflation.

Core Inflation Reading Highest Since 2008

U.S. consumer prices rose in July, reflecting escalating inflationary pressure, according to the US Bureau of Labor Statistics. A gauge of U.S. consumer prices, the Consumer Price Index increased 0.2% mostly due to a rise in shelter costs that offset a decline in energy prices. While shelter costs rose 0.3% in July, energy costs fell 0.5%. In the 12-month period through July, the Consumer Price index advanced 2.9%.

The core CPI measure that excludes the volatile food and energy components rose 0.2% last month. The annual increase in the so-called core CPI came in at 2.4%. This turned out to be the fastest annual jump in core inflation since September 2008, easily topping market expectations of 2.3%. Core inflation, by the way, rose not only because of higher shelter costs but also due to increase in costs of used cars, trucks, household furnishing and recreation.

Inflation continues to scale higher amid a record-low jobless rate and steady hiring. At the same time, rise in raw material costs are expected push inflation higher as manufacturers have to pay more because of tariffs levied by the Trump administration on products such as lumber, aluminum and steel.

This rise in inflation has also eaten into household income. Inflation-adjusted hourly wage remained unchanged in July compared to previous month and dropped 0.2% from a year earlier.

Inflation Data Clears Path for a Fed Rate Hike

With prices rising at a steady clip, the Fed is on track to raise interest rates in September. The Fed has already hiked rates twice this year and is widely expected to announce two more.

Jay Powell, the Fed’s chairman, said last month that inflation hovering near the central bank’s preferred target makes the Federal Open Market Committee believe that “for now — the best way forward is to keep gradually raising the federal funds rate.”

Higher interest rates, in the meantime, can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Rising rates also act as a boon for insurance companies as they derive their investment income from premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more, expanding their profit margins.

Who Else Profits From Rise in Inflation?

Real estate is an obvious choice because a rise in prices increases the resale value of the property over time. Further, as the value of the property rises with inflation, the amount tenants pay as rent can be raised over time. This is how income generated from a real estate property can be on par with the general rise in prices across the economy. A real estate property is purchased with the intention of earning a return on investment either through rental income or through resale of the property.

When inflation is high, the value of paper currency tanks in terms of goods and services it can buy. But rising inflation is good for gold prices, as the metal doesn’t lose value like currency in times of higher inflation. In fact, as inflation increases, demand for gold moves north. Silver and other metals also tend to rise in value during inflationary times. However, gold is generally the headline-grabbing investment.

Real estate can be purchased indirectly through investment in real estate investment trust (REIT), while gold can be purchased by investing in stocks of companies involved in the gold mining business.

5 Top Picks

We have, thus, selected five solid stocks from the aforesaid areas that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).

The First Bancshares, Inc. (FBMS - Free Report) operates as the holding company for The First, A National Banking Association that provides general commercial and retail banking services. Currently, the company has a Zacks Rank #1. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 4.7% in the same period. The stock’s expected earnings growth rate for the current quarter and year are 19.6% and 27.8%, respectively.

Berkshire Hathaway Inc. (BRK.B - Free Report) provides property and casualty insurance and reinsurance. Currently, the company has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 4% in the same period. The stock’s expected earnings growth rate for the current quarter and year are 75% and 55.3%, respectively.

Ladder Capital Corp (LADR - Free Report) operates as a real estate investment trust in the United States. Currently, the company has a Zacks Rank #1. In the last 60 days, five earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 6.4% in the same period. The stock’s expected earnings growth rate for the current quarter and year are 17.1% and 18.8%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apollo Commercial Real Estate Finance, Inc. (ARI - Free Report) operates as a real estate investment trust (REIT) that primarily originates, acquires, invests in, and manages commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments in the United States. Currently, the company has a Zacks Rank #2. In the last 60 days, three earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings rose 1.6% in the same period. The stock’s expected earnings growth rate for the next quarter and current year are 316.7% and 27.6%, respectively.

Pretium Resources Inc. (PVG - Free Report) acquires, explores for, and develops precious metal resource properties in the Americas. It primarily explores for gold, silver, and copper deposits. Currently, the company has a Zacks Rank #1. In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 42.9% in the same period. The stock’s expected earnings growth rate for the current quarter and year are 220% and 300%, respectively.

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