Ballooning food and fuel costs have asserted price pressure around the globe, limiting the ability of many central banks to cut interest rates even as a meltdown in the U.S. subprime mortgage market leads to slower growth.

Within stocks, retailers like Tesco and Metro, water group Veolia and utility EDF can provide a hedge against rising prices, analysts said.

"What we've found historically in inflationary periods and especially in stagflationary periods, is you want to be in sectors that are the source of inflation, or which have inflationary pricing or decent pricing power," said Ronan Carr, European equity strategist at Morgan Stanley.

In the eurozone, inflation moderated in April to 3.3 percent from a record high of 3.6 percent the previous month but well above the European Central Bank's medium-term target of just below 2 percent. The Bank of England expects inflation in the UK to shoot up this year and stay above the central bank's target in two years if interest rates fall.

"Consumers are cash strapped. They are seeing that a lion's share of their disposable income is being eaten up by rising fuel and food costs," said Stephen Pope, head of equity research at Cantor Fitzgerald.

"The money they have over for joyful disposable, pleasurable things is somewhat limited. So anything that interfaces with the general consumer is going to have difficulties."

Although higher inflation can hurt returns for equities, it is much worse for bonds. Morgan Stanley said UK data showed the probability of bond investors making a positive real return (after inflation) in any 12-month period since 1925 was 47 percent and the average real return was -1.6 percent.

On the other hand, equity investors had a 66 percent probability of making a positive real return in any 12-month period and the average return was 6.3 percent.

Nick Nelson, UBS' head of European strategy, last week upgraded the food retail sector to "overweight" from "underweight" saying it was one of the best stock market performers in periods of high inflation.

"You have to eat. You can make an argument that people will eat out less and eat more at home and their grocery bill might even go up," Nelson said.

The real estate and food and beverage sectors, which had outperformed in previous inflation cycles, would disappoint this time, said Morgan Stanley's Carr.

"Historically, it has a very strong correlation to inflation but we think the real estate market is half-way through a very severe downturn," he said.

Carr said margin pressures and relatively high valuations made food manufacturing and beverage stocks less attractive but he liked Vallourec and Acergy within the oil services sector.

Not all commodity stocks look expensive. According to Reuters data, the oil and mining sectors, which are the only sectors registering gains in the DJ Stoxx 600 index so far this year, trade at 11.1 and 12.7 times forward earnings, respectively. That compares with a forward earnings of 11.6 times for the pan-European FTSEurofirst 300 index.

European steelmakers, like ArcelorMittal, are also good bets, making relatively better quality steel than Asian rivals that is used in cars, aircraft and ships helping to retain pricing power, according to Stephen Pope, head of equity research at Cantor Fitzgerald.

But some analysts are more concerned about slowing growth than higher inflation and recommend taking shelter in defensive stock sectors such as utilities and food retail.

"The question has to be if you are going to be more in tune with the bond market from these levels, should you not get more defensive again? because the bond market is more in line with a sub-trend economic growth," said Philip Lawlor, chief portfolio strategist at Nomura.

"We are just in a slower growth environment," he said.

Lawlor expects the BoE will cut the UK's key interest rate, which stands at 5 percent, later this year as the central bank tries to avert a sharp slowdown in the economy.