The US consumer prices rose 5% in May, the bureau of labor statistics reported on Thursday. The market expected inflation to increase by 4.7% after increasing 4.2% in April. The upside surprise would typically be positive but not under the current circumstances.
There is concern that inflation could be rising too fast compared to the rate of economic recovery. Some analysts say that the sharp spike is likely to be temporary, but it is still a concern for consumers.
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Therefore, expect US consumers to cut spending on items they can live without and focus more on necessities. Some investment opportunities will arise from the shift in spending behavior. Here are two stocks that could benefit.
The Kroger Co. (NYSE:KR) is an S&P 500 grocery store based in Cincinnati, Ohio. The company operates food and drug stores in the US. These are products that consumers find hard to cut spending. Therefore, KR is a consumer defensive stock. It makes it a perfect candidate for investors looking to hedge their portfolios against rising inflation.
KR shares trade at an attractive price-earnings ratio of just 11.93. It has a projected earnings growth of 60% this year.
Kroger shares recently pulled back after setting a new 3-month high of about $39.40. The 100-hour moving average in the 60-min chart will provide immediate support if the stock price falls further.
Bullish investors can target rebound profits at $39.37 and $40.76. On the other hand, investors looking to short KR shares can target profits at $37.36 and $36.13.
Like consumer staples, utilities tend to thrive even when consumers cut spending. They cannot live without power, and this makes utility stocks attractive. American Electric Power Company Inc. (NASDAQ:AEP) is one of the most exciting utility stocks to buy now. AEP trades at a compelling forward P/E ratio of about 17.01 after pulling back in recent trading sessions.
AEP shares recently pulled back to trade at about $82.00 per share before mounting a recovery. The stock traded at $84.67 on Friday afternoon after the rebound. The rally has since pushed the price from oversold levels of the 14-hour RSI to the mid-section of the indicator.
Investors can target extended rebound profits at around $86.45 and $88.44. On the other hand, AEP bears can target pullback profits at $83.25 and $81.52.
Bottom line: you can buy KR and AEP to hedge against rising inflation
In summary, KR and AEP operate in industries that consumers cannot cut spending, even when inflation is rising. The 5% rise in inflation could deter consumers from spending on luxuries, but consumer staples and utilities may not be as severely affected.
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