Rebalancing for the Next Inflation Cycle: Construction and Engineering as Overweight Bets, Utilities as Underweight

The U.S. Consumer Price Index (CPI) for November 2025, at 2.7% year-over-year, marks a modest slowdown from September's 3.0%—a figure that, while seemingly benign, masks a complex narrative of data irregularities and sector-specific vulnerabilities. The Bureau of Labor Statistics' delayed data collection during a government shutdown has cast doubt on the reliability of this reading, particularly for services like housing and health insurance, where anomalies suggest artificially low inflation. Yet, even if we accept the numbers at face value, the broader implication is clear: the Federal Reserve may soon pivot toward rate cuts, but the next inflationary shock could emerge from sectors long overlooked in a low-inflation environment.

For investors, the key lies in tactical asset allocation. Construction and engineering equities, historically resilient during inflationary surges, present a compelling overweight opportunity. Conversely, utilities, whose pricing is often lagged and regulated, warrant an underweight. The data tells a story of divergent trajectories—one sector poised to capitalize on cost inflation, the other burdened by structural inflexibility.

Construction and Engineering: A Hedge Against Inflationary Rebound

From 2015 to 2025, construction and engineering sectors consistently outperformed the CPI, with nonresidential building costs averaging 4.8% annual inflation and residential projects at 5.4%. During the 2021–2022 peak, these figures spiked to 12.8% and 15.8%, respectively, driven by supply chain bottlenecks, material price surges, and labor shortages. The Producer Price Index (PPI) for construction inputs like steel and lumber underscored this volatility, with steel mill products rising 5.8% in April 2025 alone.

The sector's strength lies in its ability to pass through costs. Unlike general CPI metrics, construction cost indices—such as the PPI Final Demand for nonresidential buildings—capture full cost escalations, including contractor margins and labor. This makes construction and engineering equities a natural hedge against inflation. For instance, companies like Bechtel Group (BHI) and Fluor Corporation (FLR) have historically outperformed during inflationary cycles, as their revenue models align with rising material and labor costs.

The latest CPI data, though skewed, hints at a potential rebound. If the government shutdown's distortions fade and inflationary pressures resurface—particularly in housing and infrastructure—construction firms could see renewed demand. The Biden administration's infrastructure bill, with its $2 trillion in allocated funding, further supports this thesis. Investors should consider increasing exposure to construction and engineering equities, particularly those with strong balance sheets and diversified project pipelines.

Utilities: A Lagging Indicator in a Dynamic Market

Utilities, by contrast, are a textbook example of a sector constrained by regulatory and structural inertia. While CPI-driven rate increases are often justified by utilities, the approval process—spanning months or years—creates a lag between cost inflation and price adjustments. For example, California's real electricity prices rose 2.8% annually from 2013 to 2023, driven by grid modernization and renewable energy investments, but these increases were not immediate responses to CPI shocks.

The sector's systemic significance complicates its role in a portfolio. Utilities are essential for economic stability, yet their pricing mechanisms are ill-suited to rapid inflationary cycles. In regions like New England, where natural gas and fuel oil prices directly influence electricity costs, utilities have seen prices surge in tandem with commodity markets. However, in states like Utah and Nebraska, where abundant local resources and excess capacity have driven price declines, the sector's vulnerability to CPI-driven volatility is less pronounced.

Given the regulatory lags and the sector's limited ability to absorb sudden cost shocks, utilities are a poor hedge against inflation. Moreover, as the Federal Reserve contemplates rate cuts, the yield curve's flattening could further pressure utility valuations, which are sensitive to interest rate changes. A strategic underweight in utilities—particularly in high-cost regions—would better position portfolios for the next inflationary cycle.

The Case for Immediate Rebalancing

The November CPI report, while flawed, underscores the need for proactive portfolio adjustments. Construction and engineering equities, with their cost-pass-through capabilities and alignment with infrastructure spending, are uniquely positioned to benefit from a potential inflationary rebound. Meanwhile, utilities, constrained by regulatory delays and structural inflexibility, offer limited upside in a low-inflation environment and pose downside risks in a high-inflation scenario.

Investors should act now. Overweighting construction and engineering firms with strong project backlogs and underweighting utilities with high exposure to regulated rate-setting processes can create a portfolio resilient to both inflationary and deflationary shocks. The next CPI cycle—whether driven by housing demand, material shortages, or policy shifts—will favor those who anticipate its contours.

In the end, the lesson is clear: in a world where inflation is no longer a distant memory but a recurring risk, tactical allocation must evolve. Construction and engineering are not just sectors—they are a strategic lever for navigating the uncertainties ahead.