Inflation is up 7.9% over the past 12 months in the U.S.
The last time living costs climbed this fast was in 1982 when President Reagan was in the White House.
Things have gotten so bad, America’s central bank is stepping in.
Last Wednesday, the Fed raised its target interest rate by a quarter point to 0.5%. And it said it would raise that rate to 2% by the end of the year… and to 2.8% next year.
If we believe the Fed, all we have to do is wait for higher rates to bring lower inflation. That sounds great…
The only problem is this theory is garbage.
I’ll show you why today. Plus, we’ll review the moves you need to make in your portfolio now to hedge against rising inflation.
And if you believe mainstream economists, you may think I’m off my rocker.
The Fed employs more than 400 Ph.D. economists. They must know how to bring inflation under control, right?
But they don’t.
The Fed claims raising rates lowers inflation by making borrowing more expensive. This is supposed to curb consumer spending by discouraging borrowing.
But when you look at what’s propelling inflation higher, this makes no sense.
That’s the government’s official inflation measure. When we talk about “inflation” being up 7.9% over the past year, we really mean the CPI is up that amount.
And the CPI includes many different categories of goods and services.
Each has a different “weight.” In other words, some affect inflation more than others.
As the chart shows, some of the main drivers of inflation are shelter, food, and energy.
And it’s hard to see how higher borrowing costs will bring prices in these categories under control.
Let’s zoom in on each…
It accounts for about one-third of the rise or fall in the CPI.
It mainly covers rents. It also includes hotel and motel room costs.
And nobody in their right mind thinks these costs will come down because the Fed raises the cost of credit.
That’s because people don’t pay rent with bank loans or credit cards. They do it out of their paychecks.
There are some exceptions, no doubt. But in the vast majority of cases, the cost of credit doesn’t matter here.
It makes up 14% of the CPI.
More than half of that is from grocery shopping. And as you’ve probably noticed, prices at the supermarket have been surging.
Last year, for instance, the price of steak rose 21%. And ground beef prices went up 13%.
The Fed may imagine we’ll buy fewer steaks and make fewer lasagnas if it jacks up the costs of credit.
But people aren’t taking out loans to buy ground beef. And raising the cost of credit card debt is unlikely to change much either.
The average interest rate on credit card debt is 20.5%. If you’re so financially strained you have to buy groceries on your credit card and pay 20% interest… a slightly higher interest rate is unlikely to change that.
It takes up 7.5% of the CPI.
And energy costs have been surging.
Last year, the price of regular, unleaded gas shot up 51%.
And the cost of home-heating fuels – which include firewood, kerosene, and propane – rose 33%.
I don’t know about you. But I don’t borrow money to put gas in my car or to heat my home.
These are other examples of costs that people typically pay from income, not borrowing.
To bring energy costs down, you need more supply… not more expensive loans.
Toward the end, there’s a closeup of Homer and Marge’s baby, Maggie, that makes it look like she’s driving Marge’s car.
Maggie is sucking her pacifier and turning a steering wheel as the car careens across the road.
Then the shot pulls out. And we see that Marge is driving. Maggie may think she’s controlling the car. But she’s really next to Marge and turning a toy steering wheel.
I always think of that scene when I think of the Fed.
It’s raising and lowering interest rates… thinking it’s affecting inflation. But there’s no connection between the two.
That’s not to say that when Congress uses stimulus checks to pump money into the economy, it doesn’t drive up prices. That’s a real risk.
But there’s no good reason to believe that hiking Fed rates to raise borrowing costs will bring prices down again.
You can either be a victim of rising prices or you can make them work to your advantage.
As colleague and natural resource speculator Dave Forest has been spreading the word on, the best way to hedge against inflation is to own whatever is rising in price.
One way to hedge against rising food prices, for example, is the Invesco DB Agriculture Fund (DBA).
It holds a diversified portfolio of futures contracts of agricultural commodities including soybeans, wheat, and corn.
So it’ll go up in value with the prices of these commodities.
Higher oil prices drive higher gasoline prices.
And since the start of the year, a barrel of U.S. crude oil is up 45%.
This has sparked a rally in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). It’s up 28% so far in 2022.
XOP tracks the share prices of a basket of leading oil-and-gas exploration and production companies.
It can be hard for regular investors to get exposure to physical barrels of oil. So XOP is great because you can buy it through your regular online broker.
Finally, make sure to register for Teeka Tiwari’s U.S. Energy Independence Summit next Wednesday, March 23, at 8 p.m. ET.
He’ll discuss the tiny private company in America’s heartland that’s found a way to produce oil cheaper than anywhere else in the world.
It makes environmentally sound oil from a patented recycling process.
Already, a Wall Street powerhouse has written a check to be the biggest backer of this company.
And for the first time, anyone can get a seat at the table with it.
It’s the first energy summit of Teeka’s career. And with energy costs skyrocketing, it couldn’t come at a better time.
So make sure to sign up for that – for free – right here.
Regards,
Chris Lowe
March 21, 2022