Inflation is proving sticky. That’s what the latest Consumer Price Index (CPI) reading showed earlier this month.
If you’re a regular reader, you’ve heard me say this before: The Fed wants to control inflation – but it can’t.
The latest CPI report and current energy market trends provide good insight into why that’s the case.
I’ve been studying the Fed for more than 20 years since I walked away from Wall Street. And I’ve learned that the Fed doesn’t have as much power over the economy as it thinks it does.
So today, I’ll shed some light on this matter. But first, let’s understand the numbers from the September inflation reading.
Losing the War on Inflation
Despite the Fed’s war on inflation over the past year, high prices are still hurting your cost of living.
Core inflation saw a slight pullback to 4.1% from 4.3%. And yet, the headline inflation figure remains entrenched at 3.7%.
Taking a closer look, food prices rose by 3.7% compared to last year. The cost of shelter went up 7.2%. Inflation for services – like healthcare and public transportation – came in 5.7% higher.
But what really jumped out at me from the report was energy. After a period of decline, energy prices climbed up 1.5% between August and September.
Energy powers America’s industries. The food sector is one of them. You can’t produce pesticides, fertilizer, and food packaging without energy.
You also need energy to transport food to the store. Trucks and trains run on diesel; planes run on jet fuel. There are millions of them crisscrossing the nation each day to get produce to the market.
So, when energy prices go up, it’s only a matter of time before food gets pricier too, as producers pass along their swelling energy bills. There’s usually a bit of a lag, but it’s a given.
All this tells me we’re looking at the prospects of higher inflation down the line. And the Fed has very little control, if any, over that.
The Fed Can’t Control the Real-World Prices That Matter
This goes double for oil, a commodity that helps power the world’s major economies.
As I write this, oil prices are sitting at a near 12-month high – the highest levels of 2023 so far.
That’s due to concerns of Middle East oil supply disruptions, plus ongoing production cuts from OPEC and Russia.
These factors have nothing to do with the Fed. And yet, they hurt your wallet in a big way.
If you have pumped gas recently, for example, you’ll know what I’m talking about.
In Los Angeles, where I live, the average gas price hit $6 for the first time this year. Nationwide, gas prices are just below 2023 highs.
During this same period, the Fed has raised rates by 1%, to the highest level since 2007. And it claims it’s done so to fight inflation and help Main Street America.
But in reality, oil prices determine how much you pay at the gas pump. The Fed has zero control over that.
And the cost of gas is not the only thing affected by rising oil prices.
Remember, food prices are also linked to energy prices. That’s what the chart below shows…
As you can see above, over the last decade, global food and oil prices have moved practically in tandem.
In fact, research shows that changes in oil prices can explain more than 60% of the variation in food prices.
The Cruel Irony Behind the Fed’s Inflation Target
So, given all the above, how can the Fed still realistically aim for its 2% inflation target?
Well, this might come as a surprise to some, but the Fed doesn’t use CPI as its inflation benchmark. It uses the core Personal Consumption Expenditures (PCE) Price Index.
The core PCE excludes food and energy prices when measuring the cost of goods and services in the U.S.
The Fed claims that this allows it to gain a “clearer insight into the underlying inflation trends.”
But ironically, the Fed excludes two of the things that Americans depend on the most. The Fed isn’t even interested in stabilizing the real-world prices that matter.
What This Means for Your Money Today
The good news is, you can turn this period of distortion into an opportunity.
I see energy prices continuing to rise from here, regardless of what the Fed chooses to do next.
A simple way to position yourself to profit is with an exchange-traded fund (ETF). ETFs carry less company-specific risk than investing in individual companies.
One fund we like is the Energy Select Sector SPDR Fund (XLE). XLE mirrors the S&P 500’s energy sector.
It holds 25 names in the energy sector, including oil giants like ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP).
It also includes other firms engaged in energy production and distribution, including natural gas. And other companies offering services to the energy sector, such as drilling, production, and oilfield services.
Another broad energy fund we like is the iShares Global Energy ETF (IXC).
It holds 53 names in the energy sector, including ExxonMobil and Chevron. In fact, it holds a lot of the same names as XLE, with a clear focus on oil.
Of the two, we like XLE better. It has:
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A lower expense ratio (0.10% vs. IXC’s 0.44%).
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More assets under management ($40 billion vs. IXC’s $2 billion).
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And significantly higher daily trading volume (24.3 million shares vs. IXC’s 2.5 million).
Depending on what you’re looking for, and how much you’re willing to pay in fees, either fund is a great place to start your search.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. The Fed is incompetent, and yet it just overstepped its boundaries in a major way. In July, it started laying the foundation for a complete and total overhaul of our financial system. It’s a scheme to enact enormous change to the appearance and value of our money – in a way we haven’t seen since 1971.
I recently published a video report with my findings. These changes will impact the savings of millions of Americans, especially those with more than $2,500 in the bank. To learn more about what’s coming – and get my wealth-preservation playbook – watch my full investigative report for free, right here.