When it comes to inflation, the U.S. has been living in a fool’s paradise. Inflation — that is, the rise in the general level of prices — has been a fact of economic life, averaging 3.3% annually since 1914. But from 2009 to 2020, the consumer price index rose just 2.1% a year. We got used to inflation one-third lower than the historical norm, which is why post-COVID-19 prices have been such a shock.

The best way to drive inflation out of the system is to raise short-term interest rates. Rates had been sitting close to zero from 2009 to 2022, with the exception of a brief period around 2018. Then the Federal Reserve started to increase rates relentlessly — to more than 5% in just 2 1/2 years. The antidote worked, up to a point. Inflation dropped from 8% in 2022 to 4.1% in 2023 and to 2.9% last year. But the Fed’s target is 2%, and it’s having a tough time getting there.

“American inflation looks increasingly worrying,” a headline in The Economist said in February. President Donald Trump was elected, in part, to stop prices from rising so much, and he has been trying. With Elon Musk, he has cut government employment and programs, but prices don’t react quickly to fiscal changes unless they’re so extreme as to cause a recession — an almost certain way to end inflation with a cure as bad as the disease. The president also wants to drive down energy costs by increasing domestic oil drilling, but oil prices are determined by global forces.

Consumers are concerned, and if they start to think that inflation is rising, they will drive up prices by buying goods ahead of further anticipated increases. The most recent University of Michigan Survey of Consumers found that expectations for inflation over the next year jumped from 3.3% in the previous month’s survey to 4.3% — the highest reading since November 2023 and the second consecutive month of unusually large increases. A big reason is the threat of higher tariffs, which would raise the cost of goods that Americans buy — not just imported goods, but U.S.-made products as well.

Look for pricing power

So, the fool’s paradise may be ending. Inflation of 3% may not sound like much, but it means that the dollar loses half its value in 24 years; at 4%, it happens in 18 years. In such a scary environment, is there a way to protect your investments?

The surprise answer is to buy stocks. Consider the worst period of inflation in U.S. history, 1977 to ’81, when the CPI rose at an annualized average rate of 10%. The S&P 500 stock index returned an annualized 8% — a bit below the norm but much higher than returns on long-term U.S. Treasuries, which fell by an average of 1% a year, including interest payments and price declines.

The reason stocks do better is that businesses can counter their own higher costs by raising prices. With inflation averaging about 5% between 2022 and 2024 and the Fed aggressively boosting interest rates, the S&P 500 has produced an annualized return of about 9%.

In an article I wrote 19 years ago, with inflation rising, I recommended stocks of companies that appeared to have the power to raise their prices without much resistance. One example was Coca-Cola (symbol KO, $71), which has risen from its price back then of $22 a share while paying a dividend that has jumped by two-thirds (the yield is now 2.9%). I still like Coke; no one can make Coke but Coke. (Prices are as of Feb. 28.)

Other stocks in this category are technology businesses that sell distinctive services by subscription — charging small amounts each month for cloud storage, for example. Apple (AAPL) and Alphabet (GOOGL) are excellent choices.

A non-tech stock that raises prices with impunity is Public Storage (PSA), a real estate investment trust that provides a more mundane kind of storage —for cartons and furniture you don’t want to keep at home. Once you have stored your earthly possessions with Public Storage, moving them to escape a 5% price increase is annoying and onerous. The stock has returned an annualized 11.7% for the past five years.

People, not pork bellies

Prices of commodities typically rise in inflationary times, but buying leveraged futures contracts comes with severe risks: Transaction fees are high, and a sharp dip can wipe out all of your capital. Also, I have a bias against putting money into things (lumber, pork bellies, gold) rather than people and ideas.

Instead, invest in commodities through natural-resource funds that let you take advantage of human ingenuity as well as the prices of goods rising with inflation. An attractive choice is Vanguard Materials (VAW), with an expense ratio of just 0.09%. The exchange-traded fund’s portfolio is headed by Linde (LIN), a U.K.-based company that sells industrial gases, such as nitrogen and helium, and has a market capitalization (price times shares outstanding) of $221 billion. The stock has doubled in less than five years.

Also consider iShares North American Natural Resources (IGE), an ETF whose portfolio leans heavily toward oil and gas stocks, such as EOG Resources (EOG), but also owns such intriguing companies as CRH (CRH), an Ireland-based producer of building materials, such as granite and sandstone.

What about TIPS, or Treasury inflation-protected securities, which pay a guaranteed real rate of interest plus an inflation kicker that rises with monthly changes in the CPI? At an auction in February, 30-year TIPS were sold carrying a real rate of about 2.4%, the highest since 2001. If inflation averages 3% until maturity, your annual return will exceed 5%.

But TIPS markets are remarkably volatile. In a time of above-average inflation, I would stay away from bonds and bond funds — except those with very short-term holdings.

The problem is that when interest rates rise with inflation, the bonds you bought at a lower fixed rate lose their value.

Better to stick with stocks, even though you’ll have to be content with lower returns than in times of stable prices.

In fact, one of the best ways to ride out inflation is simply by owning a representative chunk of the market through SPDR Dow Jones Industrial Average (DIA), an ETF known as Diamonds.

Many of the Dow’s 30 components are built for inflationary times, among them Nike (NKE) and insurance giant Travelers (TRV).

Also, the Dow leans more toward value-oriented stocks, which do better during inflation, than toward growth-focused issues.