Signs continue to point to a pick up in inflation as consumer prices ticked up by 0.3 percent in April, the largest percentage gain since last June, with food, shelter and gasoline all up in the month. That follows a 0.2 percent increase in March, leaving overall consumer prices 2 percent higher over the trailing year. Even excluding the more volatile food and energy prices, consumer costs are still 1.8 percent over the past 12 months.

In another hint that inflation is finally beginning to tick up closer to the Federal Reserve’s 2 percent target, US producer prices also recorded their largest jump in 18 months in April. According to data from the Labor Department, over the 12 months through April the producer price index shot up by 2.1 percent as farmers, refineries and factories all received higher prices for their goods despite continued slack in the labor market.

If consumer prices and producer prices continue rising apace, pressure is clearly growing, and it is increasingly likely that the Fed will have to tighten down on monetary policy sooner rather than later. Over the past five years the Fed has made more than $3 trillion in cheap liquidity available as it has worked to achieve this very end result, though higher inflation has been gradually building rather than coming on in one quick burst. But now, not only will the Fed finish winding down its bond purchases by the end of this year, it might even begin raising interest rates before the second half of next year as currently expected.

As it stands though, an annual inflation rate of about 2 percent is right in the sweet spot for expanding stock multiples, assuming the Fed is able to keep it under control. According to research from LPL Financial, the largest broker-dealer in the US, when the year-over-year change in the consumer price index is between 1.5 percent and 2.5 percent the price-to-earnings multiple on the S&P 500 tends to average 17.8, compared to just 8.9 when inflation is running higher than 6.5 percent or 12.8 times when the inflation rate is flat.

Despite the fact that you can argue we’re at an ideal inflationary level, at least as far as stocks are concerned, the specter of rising interest rates as a result of that inflation has many investors worried. Not only are they concerned about the impact rising rates will have on bond valuations – it will undoubtedly be negative – they can also be unfavorable for some equities as well. Companies with heavy debt loads or which are heavily dependent on the credit markets face the prospect of higher debt costs weighing on earnings.

But as in any other market environment, some types of companies are ideally suited to higher interest rates as well as rising inflationary clips.

Insurers

Many property insurers have actually been casualties of today’s low interest rate environment thanks to the business model.

Rather than simply banking the premiums they collect, insurers typically invest their “float” in high quality bonds to earn a higher rate of return. They typically attempt to match the duration of their bond portfolios to their potential liabilities, so their portfolios tend to be made up primarily five-year and 10-year bonds, particularly Treasuries, and as a result the insurance industry tends to track broader interest rate trends. With the average yield on a 5-year currently at just 1.53 percent and a 10-year at 2.5 percent, needless to say insurers have seen their returns crimped for better than five years now.

But as bond yields have begun creeping up over the past few quarters, we’ve begun to see an improved performance of insurance companies, particularly property and casualty (P&C) insurers.

Chubb Corp (NYSE: CB) has long been one of my favorite plays on the P&C industry.

One of the largest P&C companies in the US, rather than simply focusing on rapid premium growth it has always emphasized profitable underwriting, or minimizing risk. To that end, the firm primarily targets high wealth individuals in its personal insurance business, increasingly switching costs for customers since their policies are priced on the current values of their property and assets. It has also been extremely successful on the specialty insurance side of its business, showing lower loss ratios than most other insurances. So, while the S&P business has been pummeled by catastrophic loses over the past few years, while Chubb has paid out its fair share of claims, they haven’t been nearly as high as many of its peers.

Still, Chubb has been able to push through pricing increases in the mid-single-digits along with its peers, helping to pad its bottom line as well as its top. In the first quarter of this year the company reported that profits were up by 1.5 percent as earnings per share climbed from $1.98 in the same period last year to $2.10. Premium revenue was up 1.7 percent year-over-year to $3.03 billion in the quarter, with underwriting profit up to 14.3 cents per premium dollar versus 13.7 cents last year.

Those higher earnings came despite the fact that the insurer’s investment income actually posted a marked decline, falling from $364 million in the first quarter of last year to $342 million, thanks to low interest rates limiting the return on its bond portfolio. But with interest rates likely to start ticking higher in the coming months, Chubb will be able to reinvest the proceeds of its portfolio into higher yielding bonds, which will generate increasingly attractive returns. That will be particularly true relative to policies written over the past five years, when actuaries would have been using lower bonds yields when setting premiums. As a result, Chubb will be reinvesting at higher rates than were expected when policies were priced, allowing it to recognize more revenue and earnings.

In addition to driving capital appreciation, greater earnings thanks to higher interest rates will also help fuel Chubb’s generous dividend. As you can see from the chart below, it has increased its payout each year since 1989, with an average payout ratio of about 22 percent, leaving plenty of upside for future growth on higher earnings.

Currently yielding about 2.2 percent, Chubb Corp is a great buy up to 100.

Consumer Staples

Regardless of whether food prices are stagnating or skyrocketing, we all still have to eat; the US Department of Agriculture estimates that the average American consumes 4.7 pounds of food each day. But when prices are higher, consumers will naturally seek out lower-cost sources for their pantry staples.

If you’ve ever been inside of a Costco (NSDQ: COST) location, your first impression was of a Spartan, warehouse appearance.

The chain of warehouse stores stocks between 3,500 and 4,000 stock-keeping units, a variety of fresh vegetables and meats as well as laundry detergent, toilet paper, televisions, jewelry, clothing, eyeglasses and everything in between. But rather than utilizing centralized warehouses as distribution hubs, Costco stores its entire inventory on barebones shelving units nearly reaching the ceilings of its individual locations. It also employs the bare minimum of staff to operate each location, keeping both maintenance and personnel costs down.

Despite having just 649 warehouses worldwide – a tiny fraction of the number of stores operated by its competitors – it is able to purchase its inventory directly from manufacturers rather than through distributors, allowing it to achieve more favorable bulk pricing rates.

Considering that Costco sold $5.3 billion worth of meat last year and $4.9 billion worth of fresh produce, not to mention $11.2 billion worth of gasoline, most investors would probably think that Costco is significantly exposed to price inflation. While that is true to some extent, with price markups in the low teens as compared to the high teens at Wal-Mart (NYSE: WMT) and its Sam’s Clubs warehouse stores and the 20 percent range at grocery stores, Costco is able to pass along most of the price inflation and still offer a superior value.

Additionally, a significant portion of Costco’s revenue is generated through membership fees. Rather than simply allowing the public to come in and shop to their hearts’ content, Costco requires shoppers to maintain membership with the company. The standard annual membership fee is $55, though for an executive membership, which costs $110, shoppers receive cash back on 2 percent of their purchases, up to $750 cash back per year.

In the most recently reported fiscal second quarter, the company generated $550 million in membership fees, up 4 percent from the year-ago period. New memberships were up 13 percent with the higher priced executive memberships growing by about 16,000 per week to 35 percent of Costco’s membership base.

Existing customers also tend to be extremely loyal as about 90 percent renew their memberships each year. Thanks to that loyalty and strong membership growth, there are now 73.4 million total cardholders representing more than 40 million households around the world, even as membership fees and general merchandise costs have been on the rise in recent years. That has helped drive more than a decade of strong earnings and revenue growth.

So while Costco’s days of heady growth prior to the recession are probably behind it – in 2008 recent and grown <~~meaning is not clear an average of 11 percent over the trailing three years – it is now running at an attractive 10.5 percent, up from 5.9 percent in 2009. Earnings per share have also grown at an attractive three-year average of 16.4 percent and are expected to continue growing by 10.8 percent over the next five years according to the consensus expectation.

In addition to being able to pass on higher costs, Costco is also relatively unexposed to rising interest rates. With only about $400 million in long-term debt currently outstanding, most of which is priced at the extremely favorable rates companies have enjoyed over the past several years, Costco’s debt service costs aren’t likely to increase materially even as the Fed starts tightening.

Able to easily pass along higher inventory costs thanks to its strong value proposition and a debt to equity ratio of just 0.4, Costco rates a buy up to up to 125.