A Thief Is Quietly Picking Your Pocket

There’s a thief at work, and you’re the target. In fact, that thief is quietly picking your pocket right now.

That thief is inflation. We keep hearing that “Inflation is coming! Inflation is coming!” Well, inflation is here. And as a result, every dollar in your pocket is seeing its buying power chipped away, month after month.

For a long time, many believed inflation was dead. The Wall Street Journal recently wrote: “Lackluster inflation has been a defining characteristic of the U.S. economy in the years since the 2008-09 crisis.” Boy howdy, is that changing. In fact, I believe inflation is worse than the government lets on.

First, we have to agree on how to measure inflation. The two common measures of inflation are the Consumer Price Index (CPI), tracked by the Bureau of Labor Statistics, and the Personal Consumption Expenditures (PCE) price index, tracked by the Bureau of Economic Analysis.

CPI is the most commonly cited, and it’s used to adjust social security payments and is the reference rate for some financial contracts, such as Treasury Inflation-Protected Securities (TIPS) and inflation swaps.

On the other hand, the Federal Reserve states its goal for inflation in terms of the PCE. And that brings us to an interesting chart from the Wall Street Journal …


 

It shows CPI in red and PCE in yellow. The effective Fed funds rate, also set by the Federal Reserve, is in blue. Importantly, CPI is rising sharply while PCE lags and the Fed funds rate continues to scrape the bottom. A near-zero Fed funds rate means more easy money, which stokes inflation even more.

In March, the CPI jumped 0.6% from February, the quickest pace in almost a decade. And it’s up 2.6% from a year ago. Copper, aluminum, oil, steel and more are all up sharply, while lumber hit its highest price ever. Ever!

Well, what do we care about commodity prices? Those are inputs, and the corporations that make all the stuff you buy can only stomach the pain for so long before they pass that pain along. Now, companies from The Coca-Cola Company (NYSE: KO) to Kimberly-Clark Co. (NYSE: KMB) to Whirlpool Corp. (NYSE: WHR) and beyond are gearing up to raise the prices they charge consumers.

What’s more, countries around the world are also experiencing inflation. We buy a lot of stuff from other countries. So, their pain is being passed through the global supply chain to squeeze you right where it hurts — in your wallet.

And mind you, those are the official numbers. I’ll argue that yields of short-term, inflation-indexed TIPS are a more honest measure of inflation. That’s what Wall Street thinks inflation is. And according to TIPS, real U.S. consumer price inflation is running at about 4% a year. That’s well above the Federal Reserve’s 2% target, and that’s far higher than the 2.6% year-on-year increase reported for April.

The good news is there are plenty of investments that do well in inflationary times. I’ve been recommending them to subscribers of my premium publications. Now, let me give you three more simple ways to protect yourself against inflation with ETFs.

Idea 1: SPIP

The SPDR Portfolio TIPS ETF (NYSE: SPIP) invests in TIPS, which I mentioned above. When the CPI goes up, the principal value of TIPS rises, AND the interest income rises as well.

Idea 2: DBC

The Invesco DB Commodity Index Tracking Fund (NYSE: DBC) invests in futures contracts on 14 commodities. These include gold, copper, corn, soybeans, gasoline and more. I just wrote on Saturday about how agricultural commodities are flying higher. You can bet that other commodities will, too. Importantly, you can own the DBC fund and get the benefit of futures going higher without having to own futures themselves.

Idea 3: GLD

Gold has long been trusted to be a hedge against inflation for the simple reason that while you can print money from here to the moon, you can’t print the yellow metal. I posted a couple charts on Twitter this week explaining why I believe the bottom is in for gold. The SPDR Gold Shares (NYSE: GLD), which buys and holds physical gold, is an easy way to play it.

Those are three ideas. I’m giving my premium subscribers many more. That thief with his fingers in your pocket is only going to get grabbier. You can get mad, or you can start making money. It’s up to you.

All the best,

Sean

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