It's no secret that inflation can eat away at not only your wallet or pocketbook, but your investment portfolio as well. What causes inflation? Inflation usually occurs when the government hikes the money supply. When that happens, companies raise the prices of their products or services to keep pace with the increase in the money supply. Inflation can also rise when products and commodities grow scarce. When bad weather, for example, reduces the cotton supply, prices for ever-scarce cotton are sure to rise.

That's why it's so important to find investment vehicles that beat the pace of inflation from year-to-year. Your best inflation beater? Try stocks. Especially stocks that historically do well in times of inflation, like energy or consumer stocks.

Stocks historically beat the annual rate of inflation-at the highest rate of major investment asset classes that do beat inflation. From 1967 to 2007, the Standard & Poor's 500 stock index rose by an annual average of 7.14% versus the 4.67% in the annual inflation rate, as measured by the U.S. Government's consumer price index (CPI).

Knowing how to invest in the stock market when bears are on the prowl is as much about plain, old-fashioned common sense, as it is about anything else.

Historically, inflation-fighting stock investments are found in undervalued companies with good long-term growth potential. Identifying such companies isn't easy but it is doable. As in any other stock-picking endeavor, the trick is to focus on company fundamentals, like earnings, sales revenues, cash-on-hand, stability of management, and long-term growth potential. As with most bargain hunters, investors looking for stocks that best tough economic and market periods usually focus on those companies that are good revenue producers and are capably managed, although under-priced.

What particular stocks do best against inflation? According to Standard & Poor's, energy stocks fare the best in inflationary times. Utility stocks and consumer goods stocks (food, household goods, and medicine) also do very well.

It's clear why. In inflationary times, when prices rise but consumer growth slows, U.S. consumers need to prioritize what they can purchase, especially if the economy is in or near recession. So consumer goods like baby formula, orange juice, toilet paper, and aspirin make the cut. Big ticket items like new cars or big screen TV's don't.

Same idea with energy and utility stocks-people need gasoline to get to work, and gas and electricity to keep their homes warm. So those sectors see stable, if not heightened, growth during periods of inflation.

Stock sectors that don't perform well in a rising inflation climate include the auto industry, airlines, technology stocks, and retail stocks. The biggest declining stock sector during bear market periods? It's the financial sector, which S & P estimates falls by an average of 75% against the rest of the stock market when inflation is running rampant.

Another sector to shy away from in down markets is technology. When investing in periods of low economic growth, the key is to keep things simple-and to choose companies that do the same. Good stock pickers like to base their stock picks on, among other things, what a company will look like 10 years down the road. Technology companies, though, are much too volatile and risky for that kind of analysis. The 10-year plan also applies in a backward sense-it's a good idea to only consider companies with a good 10-year track record. Most technology companies haven't been around that long and, for their lack of seasoning and earnings history, tend to fall of the radar of inflation-friendly stocks.