When investors hear inflation, equity markets usually run for the exits, as inflation is generally bad for stocks.

Two economic indicators for inflation recently signaled an uptick in nominal terms, as oil has remained at heightened levels. For the month of May on a year-over-year basis, the consumer price index was up 4.2%, while the producer price index jumped 7.2%, marking the eighth consecutive month in which that number was above 6%, which hasn’t happened since 1977 to 1982.

But inflation may not be as negative for small-cap stocks as large-cap stocks.

“[Inflation] is actually pretty good for small caps,” Mary Lisanti, president and chief investment officer of AH Lisanti Capital Growth, said. “Even the 20% inflation we saw in the ’70s was good because their stuff is differentiated enough that they can raise prices.”

Lisanti also points to better control of costs for reasons why small caps wade inflation better than their larger brethren. “These things are working for them now that worked against them for the past four or five years,” she said.

In an interview in March, Lisanti said, “The best of all worlds for small growth stocks is one in which GDP is growing slowly, inflation is modest, and rates are low — such as the early 1990s.”

According to Doug Roberts, author of the book Follow the Fed to Investment Success and chief investment strategist for ChannelCapitalResearch.com, inflation is actually less negative for small-cap stocks in the short-run and positive in the long run.

Roberts uses what he calls the “battleship and PT boat analogy” to explain why the effect of inflation on small caps can be less negative than on large caps. “Even though a PT boat is smaller, if you're trying to shoot it, it has increased speed and can adjust pretty quickly, whereas a battleship, even though it's bigger and has . . .

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