Investing Through Inflation: Why Quality and Valuation Matter

Inflation has once again become a central concern for investors. Although inflation has moderated from its post-pandemic highs, prices for goods and services continue to increase, putting pressure on consumers’ purchasing power. According to the Bureau of Economic Analysis, the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, increased 3.4% over the 12 months ending August 2026, unchanged from July and remaining above the Fed’s long-term inflation target of 2%.

For investors, inflation presents a challenge that extends beyond rising prices at the grocery store or gas pump. It gradually erodes the purchasing power of money, meaning an investment portfolio must do more than simply increase in dollar value. To grow wealth in real terms, investment returns must ultimately outpace inflation.

At Summitry, we believe preserving and growing purchasing power over time depends less on predicting the next inflation report and more on owning high-quality businesses purchased at attractive valuations.

While inflation can be driven by strong consumer demand, some of today’s price pressures are harder for the Federal Reserve to control through interest rates.

One driver of inflation today is the ongoing war in the Middle East, which has disrupted energy supplies and pushed oil prices higher. According to the U.S. Energy Information Administration, Brent crude oil averaged $114 per barrel in September, up from approximately $71 in February, before the conflict began. Rising energy prices affect more than gasoline costs. They also increase transportation, manufacturing, and distribution expenses, potentially raising prices throughout the economy.

Another contributor is the rapid expansion of artificial intelligence infrastructure. Significant investments in data centers have increased demand for electricity, semiconductors, construction materials, and other resources. While these investments have the potential to increase productivity and support economic growth over time, they can also create near-term price pressures in markets where supply cannot expand quickly enough to meet demand.

Alongside oil prices and the AI buildout, tariffs have added further cost pressures for businesses that rely on imported goods and materials.

These dynamics create a more complicated environment for the Federal Reserve. In September, the Fed raised its benchmark interest rate by 25 basis points to a range of 3.75% to 4.00%. However, higher interest rates cannot directly restore disrupted oil supplies or accelerate construction of electricity infrastructure.

Unlike inflation driven primarily by excess consumer demand, these pressures could persist even if economic growth slows. That raises the possibility that the Fed may need to maintain restrictive monetary policy despite broader weakness in economic activity. Alternatively, a normalization in energy supplies or productivity improvements from AI could help moderate inflation. Regardless, the ultimate path of inflation and interest rates remains uncertain.

Inflation can affect businesses in several ways, from changes in consumer demand that influence revenues to rising costs that pressure profitability, both of which can ultimately impact stock valuations. However, not all businesses are affected equally, and some are better positioned to navigate these challenges than others.

Consumer demand and revenue. As households spend more on necessities such as food, housing, and energy, less remains for discretionary purchases. Lowe’s investments in professional contractors and home services have helped offset this pressure, with both businesses delivering sales growth in the second quarter of 2026. Their resilience supported overall comparable sales growth, despite continued weakness in discretionary home improvement spending.

Profitability. Higher wages, raw material prices, and transportation costs can pressure profits. Carrier is addressing these challenges through price increases and improved operating efficiency.

Business model advantages. Some business models offer protection against inflation. Portions of Visa’s and Mastercard’s revenue are tied to the dollar value of transactions. Higher prices can therefore support revenue growth without a proportional increase in operating costs, although weaker consumer spending remains a risk.

Stock valuations. A stock’s value is largely driven by two factors: the future cash flow a business generates, and the multiple investors are willing to pay for that cash flow. Inflation can affect both. Companies facing weaker consumer demand or higher operating costs may see their expected cash flows decline, while lower growth expectations can also reduce the multiple investors are willing to pay. Even businesses that are relatively insulated from inflationary pressures may face valuation challenges, as persistent inflation can keep interest rates elevated, making safer investments like bonds more attractive.

At Summitry, our investment philosophy is built around identifying growing businesses with strong competitive advantages, capable management teams, and attractive valuations.

One reason we favor competitively advantaged businesses is their ability to better withstand inflationary pressures. Companies with loyal customers, essential products or services, and efficient operations may have greater flexibility to raise prices, manage costs, and maintain profitability. However, even the strongest businesses are not immune to inflation, particularly over shorter periods.

As the Lowe’s and Carrier examples illustrate, management quality is equally important. Strong leadership teams must determine when to adjust prices, where to control expenses, and how to continue investing in the long-term competitiveness of their businesses. We look for management teams capable of navigating these challenges without compromising the long-term strength of the underlying business.

Yet business quality alone does not guarantee attractive investment returns. The price paid for that business matters just as much. Even when a company grows its earnings, its stock price can decline if investors become less willing to pay a premium for those earnings.

That is why our investment process considers not only a company’s long-term growth opportunities, but also the price we pay and how the business might perform under different economic conditions.

By combining business quality with valuation discipline, we seek to create a margin of safety against unexpected challenges.

We cannot reliably predict where inflation will be next month, next year, or even several years from now. Its path will depend on economic conditions, monetary policy, geopolitical developments, and other factors beyond our control.

Rather than positioning our portfolio around a particular inflation forecast, we focus on understanding the risks facing the businesses we own and adapting as conditions change. Even strong businesses will face periods of pressure, and their stock prices will fluctuate along the way.

Ultimately, our objective is not simply to grow the dollar value of our clients’ investments, but to protect and grow what those dollars can purchase. While economic conditions will inevitably change, our commitment to that objective remains unchanged.

The views expressed are those of the Summitry investment team and are intended for informational purposes only. The securities identified and described do not represent all the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.