Since 2024, Indian investors have enjoyed a pleasant honeymoon with inflation. Good monsoons and low crude oil prices have meant that CPI (Consumer Price Index) inflation has stayed well below 4 per cent mark in this period.

Thanks to the Iran conflict, this situation is now set to change. Irrespective of whether the Trump ‘deal’ is struck or not, a portion of the global oil and gas capacity has been damaged by the war. The closure of Hormuz has disrupted shipping routes and supply chains, which may take months to normalise. Global prices of petroleum, gas and their derivative products are not fully reflecting these disruptions yet, as floating inventories have helped alleviate shortages.

But now, with oil companies beginning to announce successive price hikes, the impact of supply chain breaks beginning to show up, and a looming El Nino set to fire up food prices, India’s inflation rates look likely to spike again. History has shown that spikes in inflation, driven by multiple triggers, do not fade away quickly and last a while.

We should also be open to the possibility that this could be mean reversion playing out, as India’s long-term CPI inflation rate has averaged 6 per cent.

Therefore, how should you as an investor prepare for this reversal? Where should you invest to beat higher inflation? Let’s take stock.

Gold: Ineffectual hedge

Theoretically, gold is supposed to be a good hedge against inflation because it preserves its value against paper money. This is true in the long run. But gold has proved an ineffectual hedge against inflation in the short term.

Since the Iran war began, global gold prices are down 14 per cent in dollar terms. In India, rupee depreciation has cushioned this fall. However, gold prices are still down some 2 per cent since the war began, after rising 65 per cent in the year before.

This strange behaviour of gold is underpinned by two factors. One, this conflict by disrupting global trade, has prompted some central banks to sell gold to help their nations tide over their tight finances (Russia, Turkiye). Two, the risk of rising inflation has caused global yields on treasuries (government bonds) to spike. Treasuries compete directly with gold as safe-haven options for global investors. Therefore, when treasury yields improve, gold gets sold off by global investors.

In recent years, gold prices have been influenced a lot by treasury yields, preventing gold from acting as a good inflation hedge. As an investor, you should still hold gold as a good portfolio hedge against geopolitical risks and equity volatility. But you should not look to gold to protect against short spells of high inflation.

Debt: Shorter the better

If there’s one set of investors who are clear losers from rising inflation, it is those who have locked into fixed interest on bonds or deposits. While their interest income remains unchanged until maturity, inflation eats into the real returns that they take home. A spike in inflation also raises the possibility of rate hikes leading to capital losses on bonds.

If you are a debt investor though, there are some options that help you benefit from rising inflation (and thus rates). One, you can buy floating rate bonds. The Government of India’s Floating Rate Savings Bond (interest rates are pegged to a 0.35 per cent spread over the National Savings Certificate) is one good option. The interest rate on this bond is today at 8.05 per cent and can improve further if returning inflation leads to higher rates. Two, there are some categories of debt mutual funds which help you piggyback on rising rates. Floating rate debt funds, which use swaps to mimic floating rates are one option. Money market mutual funds, which invest in treasury bills and other safe instruments with under one-year maturity, are another. Ultra-short duration funds, which stick to corporate and government bonds with three- to six-month maturity, are a third option.

In a rising inflation scenario where policy rates are yet to be hiked, bonds, deposits and mutual funds with more than one-year maturity are best avoided, as they deliver negative real returns.

Equities: Selective gains

Theory has it that equities are the only asset class that can convincingly beat inflation in the long run. This is so for three reasons. One, when inflation rises, the economy’s nominal growth picks up, lifting corporate revenues. Two, rising inflation lifts salaries and wages, stoking spending. Three, the raison d’etre for equities is to deliver a gain to the business owner over and above the cost of debt. Therefore, in the long run, equity returns are bound to outdo debt.

However, when we get down to practise, the reality is more nuanced. When input inflation suddenly rears its head, companies face immediate margin pressures. Their ability to grow their profits during spells of rising inflation, therefore, depends on their pricing power — the extent to which they are able to pass on inflated costs to their end-consumers.

In today’s context, Q4 FY26 results showed companies reporting healthy operating margins even as toplines recovered. This was because, in this quarter, companies were benefiting from rising end-product prices, while they used up their existing raw material inventories. The current quarter may offer the real test of what happens when input cost inflation begins to pinch corporate profit margins.

Therefore, when choosing stocks and sectors to buy today, it is critical to look for companies that have pricing power. Experience suggests that companies operating in duopolistic or oligopolistic sectors, those with wide brand or distribution moats, sector leaders with dominant market share and companies that have a services component in their revenue mix, have the most pricing power.

The other way to hedge against an inflation spike and actually make money from it, it to bet directly on companies churning out commodities whose prices are rising. As commodity cycles are hard to decipher, this is best done through commodity ETFs (exchange traded funds) or international funds which own a basket of commodities.

Passive funds playing on the Nifty Commodities Index, which has a mix of energy, metal, chemical and cement companies, are one option. There are also a few interesting funds on the international menu that offer a direct play on commodities. DSP World Mining Overseas Equity Fund and ICICI Pru Strategic Metal and Energy Equity are some funds to explore.

The author is a Contributing Editor

Published on May 30, 2026