Warren Buffett says inflation is coming. Here are the best ways to trade it

Published Mon, May 3 202111:59 AM EDTUpdated Mon, May 3 20211:21 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Legendary investor Warren Buffett said on Saturday that he is seeing rising input costs in several different parts of his business empire, leaving many wondering how this will affect the stock market. The "Oracle of Omaha" said during Berkshire Hathaway's annual meeting that he is seeing " very substantial inflation " and his companies are raising prices. Berkshire joins many other companies, such as Clorox , to say they are hiking prices due in part to rising input costs. Commodity prices, from lumber to corn to palladium, have surged in recent months. The rise in inflation is not completely unexpected, as Federal Reserve officials have warned of a spike in prices as the U.S. economy reopens. Many Wall Street firms have already built lists or model portfolios for investors to consider when preparing for inflation. The billionaire investor's answer to inflation questions hints at one of the most common ideas about how to play inflation: pricing power. For companies with strong pricing power, rising input costs can simply be passed along to customers with little impact to their bottom lines. For others, however, it can put pressure on their margins. "Unless you have cost-out plans to go along side it, I think you could see it become an issue for a number of companies," said Bill McMahon, the chief investment officer of active equity strategies at Charles Schwab Investment Management. "That's one thing where I think a lot of investors kind of miss is that not all companies have the pricing power to offset inflationary pressures." Goldman Sachs put together a list of names last month that have pricing power within their sectors . Goldman's list cuts across sectors, with consumer-facing tech names like Activision Blizzard and Etsy , but also household products company Colgate-Palmolive and veterinary pharmaceutical name Zoetis . "Firms with low pricing power have historically outperformed when S & P 500 profit margins expand. Rising inflation may restrict some firms fro