Finding companies with pricing power to protect against inflation may mean looking down the value chain, argues T. Rowe Price
In their June 2026 mid-year outlook T. Rowe Price espoused the view that inflation risk should trump recession risk in how investors approach markets today. They see this as a structural departure from the last few decades where recession risk was the primary focus for asset managers. Inflation, they explain, has gone from almost non-existent into the primary source of investment risk. The trouble for investors is that recession risk is easy to manage with bonds. Inflation, as we saw in 2022’s bear market, can push stocks and bonds down together, meaning investors need to find a new way to manage it.
The textbook control for inflation risk is to identify equities with pricing power. Businesses that can pass higher costs on to their customers can usually grow faster than inflation. The tricky part is finding the businesses that have pricing power, especially in a rapidly shifting global economy upended by geopolitical tension, reshoring of manufacturing, and the rise of artificial intelligence (AI).
“I think the key is that you need active management to take advantage, because it is going to constantly be changing,” says Timothy Murray, VP and Capital Market Strategist in the Multi-Asset Division of T. Rowe Price in Baltimore. “There also needs to be a recognition that natural resources are also going to be more in demand because we need to build more stuff because of AI.”
Murray sees additional complexities beyond the AI buildout. He notes that China is no longer exporting deflation. At the same time, countries have become focused on energy security, resource security, and domestic manufacturing. All of that, he says, should support resource extraction and energy names, which could imply some greater home bias among Canadian investors. While all those factors contribute to this shifting theme, Murray emphasized an understanding of the AI buildout as a route to finding companies with pricing power.
How data centers dictate pricing power
Before the rise of AI, with its huge infrastructural and resource requirements, big tech companies were defined by their capital light businesses with a high degree of pricing power of their own. As that field, once called the FANGs, then the Magnificent Seven, winnowed down to the ‘hyperscalers’ of Microsoft, Google, Meta, Amazon, and Oracle the big tech names began to shift. In building AI infrastructure, these companies began allocating all of the massive free cash flows that once defined them, going so far as to issue debt to finance this buildout. Now, Murray explained, those hyperscalers don’t have pricing power, the companies they buy from do.
That dynamic has created a series of rolling bottlenecks. The first, and most prominent, was in Nvidia’s graphics processing units (GPUs), but that was followed by a shortage in memory that sent memory manufacturers’ stocks soaring. Now we’ve seen a focus on CPUs, which has powered Dell stock to new heights.
What Murray believes investors need to look for in this environment is the so-called “golden screw,” a crucial component made by only a few companies in scarce supply. They need to identify those golden screws before the rest of the market does so they can participate in an eventual pop. At T. Rowe Price, the team has set up an internal map of a data center to try and identify what will be the next big item in demand. They use that map to work out the components that could be in short supply soon and identify the companies and sectors that can benefit when that shortage occurs.
Murray acknowledges that there are risks to a focus on the AI buildout. The first is that AI infrastructure is eventually overbuilt, as we saw with the construction of railroads, electricity, and fibre optic networks. While he says there are concerns about AI infrastructure eventually exceeding demand, Murray says there are no signs we’re near that point yet. There are also political risks associated with the infrastructure buildout, as communities increasingly call for the utility usage and energy costs associated with this buildout to be borne by the companies building and operating these data centers. While that may add to the cost of AI, Murray doesn’t see that pushback slowing the trend down in the immediate future.
Long-term implications and immediate advisor takeaways
While AI is a significant inflationary force right now, and a route to identifying the companies with pricing power, Murray acknowledges that if its productivity promises are realized it should eventually become deflationary. AI, he explains, should be deflationary to services as it replaces labour in many knowledge-based roles. Services inflation tends to grow steadily, while goods inflation tends to spike high in periods of time, like the one we’re in right now. Murray expects this shift from AI as an inflationary force to a deflationary force should occur in five to ten years’ time as companies use AI to replace more of their workforces.
In the meantime, Murray sees this inflationary trend continuing, benefitting names further down the value chain and in sectors that may not have been the darlings of recent years. Jeffrey Li, Senior Relationship Manager, Intermediary at T. Rowe Price in Toronto, echoes that view and stressed what advisors need to be telling their clients.
“The companies that passed on inflationary costs historically tended to be some energy companies, industrial, and financials as well. And that is much more dominant within a value benchmark than it is a growth benchmark. And over the last three to five years a lot of clients and advisors have been quite growth oriented whether it was deliberate or not. Simply investing in the S&P 500, for example, could arguably be of a growth tilt. And advisors are much more aware these days the opportunities that within US value. And that also goes in hand with the broadening of the market,” Li says. “It’s not just led by these hyperscalers. You’re getting other benefactors from the data centers: industrials and the golden screws.”
