The Three Most Important Words of the Week: Consumer Price Index
|
Listen to this post
|
This is one of the key data points that the Federal Reserve follows to determine whether it will continue to hike interest rates.
CNBC shared the expectations before the numbers were released:
The consumer price index is expected to have risen by 0.4% in February, or at a 6% annual pace, according to Dow Jones. That’s compared to increases of 0.5% and 6.4%, respectively, in January. Tuesday’s report of CPI has been much anticipated. Some market pros last week had even expected that the Federal Reserve could increase the magnitude of its rate hiking to 50 basis points if the number was hot. But the failure of Silicon Valley Bank and market worries about contagion have made a quarter-point hike more likely, though some economists expect no increase at all.
The CPI update was revealed at 8:30 a.m. yesterday.
Here’s what happened.
The CPI rose 6% year-over-year (YoY), which was in line with expectations. Food inflation remains hot, down from January but still up 9.5% YoY. Energy is also down since January and reported a 5.2% increase YoY.
We’ll still have to wait until next week to see what the Fed decides to do with this information, but the CME FedWatch Tool placed the probability of a quarter-point hike at 79% on Tuesday, up from 65% on Monday. That probability is on the higher side, but it still leaves a little room for uncertainty.
Editor’s Note: After spending three years and four million dollars on a new research project, TradeSmith CEO Keith Kaplan just revealed a trading system with near-95% accuracy as of late January. With all the uncertainty we’re facing — like the question of whether the Fed will continue raising rates and by how much — who wouldn’t want a 95% chance of being right?
But what’s important to understand is that even though inflation is “cooling,” it is still high, and Senior Analyst Mike Burnick made noted in February that he didn’t have much faith in the Fed getting things under control.
When one of our readers asked if I had confidence that the Federal Reserve would get inflation under control heading into 2023, my answer was a direct “No.”
The Fed is largely staffed with academics and economists who have never run a real business a day in their lives, much less invested money for clients. There are exceptions, but by and large, most of the Fed folks seem out of touch with the financial markets.
I’m sure they mean well, but the majority simply don’t have the investment cred.
The Fed is largely staffed with academics and economists who have never run a real business a day in their lives, much less invested money for clients. There are exceptions, but by and large, most of the Fed folks seem out of touch with the financial markets.
I’m sure they mean well, but the majority simply don’t have the investment cred.
Fair enough.
So, the question becomes, how do you need to invest when inflation may have peaked but is still high?
Here’s more from Mike:
Part of being a savvy investor in this whipsaw market involves owning inflation-resistant stocks that give you income in the here and now through dividend payouts.
By generating income and owning the companies that will be rewarded for their sound financial performances, you are better equipped to keep up with the high prices for goods and services — and less likely to see your hard-earned money dwindle away.
Companies with great brands can handle higher costs because they can pass those costs on to consumers; people are willing to pay those higher prices because they won’t trade off or trade down for another brand.
By generating income and owning the companies that will be rewarded for their sound financial performances, you are better equipped to keep up with the high prices for goods and services — and less likely to see your hard-earned money dwindle away.
Companies with great brands can handle higher costs because they can pass those costs on to consumers; people are willing to pay those higher prices because they won’t trade off or trade down for another brand.
One of those companies is J.M. Smucker Co. (SJM), which is considered a “buy” in our Green Zone.
It produces the Jif peanut butter and Smucker’s strawberry jam for the PB&Js in the lunchboxes of schoolchildren across the country.
Its Folgers Coffee has an estimated 35 million drinkers, filling up their coffee cups to start the day or their travel mugs to power through the night shift.
And its Milk-Bone biscuits are the treat of choice for many a beloved dog.
It currently pays out a dividend of $4.08 — a yield of 2.75% — and was recently crowned a Dividend Aristocrat.
Another company in the Green Zone that has great brands and pays its shareholders a dividend is Anheuser-Busch Inbev (BUD). BUD triggered an Entry Signal near the start of the year on Jan. 11.
All across the world, at any moment of the day, people are drinking Inbev products in bars, adding them to their shopping carts while getting groceries, or buying them in a nearby liquor store.
In addition to Bud Light and Budweiser, Inbev brews over 500 beers, such as:
- Beck’s
- Corona
- Hoegaarden
- Michelob Ultra
- Modelo
- Stella Artois
However, the company is not hanging its hat on just its traditional beer lineup.
It’s expanding into other categories, like nonalcoholic beer and spritzers.
There are things people will trade down for — like a cheaper laundry detergent brand — but most folks aren’t going to give up their favorite alcoholic beverage.
If BUD has to pay higher costs for cans and ingredients, Budweiser and Bud Light loyalists are less likely to trade off or trade down for different options; they want their favorite beer and will be willing to pay that little bit extra.
BUD currently pays out a dividend of $0.79, which is a yield of 1.32%.
The Fed will meet next week on March 21 and March 22.
As always, we’ll be in your corner to help you make sense of what’s happening and what to do.