We sometimes hear that prices of goods other than oil are falling. Not so fast. While the inflation rate has dropped, that doesn’t mean prices are lower. Instead, they are just rising at a slower rate. That is why we hear a lot about “affordability.”
The February consumer price index (CPI) rose 2.4 percent annually, which is approaching the Fed’s two percent inflation target. But there is an asterisk. That inflation reading came before the war with Iran and its inflationary pressure.
One of President Trump’s economic beliefs is that low oil prices leads to falling inflation and strong growth. But oil is higher now, at least temporarily, so there are two problems: higher oil prices raise costs and companies will pass much of the cost on to the consumer. The other problem is that high oil costs give companies an excuse to raise prices. Companies with falling profit margins can raise prices and blame it on oil prices. I expect we’ll hear about this during the next earnings season.
Politicians will also offer excuses for the inflation. One month it was because of healthcare costs. The next will be because of a temporary spike in energy costs. Whatever the case, lowering interest rates in an inflationary environment isn’t sound economic policy. For that reason, Wall Street has lowered its projected Fed interest rate cuts to just one this year.
Readers of this column know that I’ve been bullish on the energy stocks, especially infrastructure companies like Williams Cos. and Kinder Morgan. These were first purchased because of their steady revenue streams and high dividend payments. Then, by luck, they become data center energy plays. Now the war highlights yet another reason to own energy stocks: They help insulate portfolios from an energy crisis.
Some bearish events are easily reversible. A year ago Trump placed high tariffs on most countries. After stocks reacted poorly, he quickly lowered them and the bull market resumed. The worst bearish events are those whose outcome is mostly out of people’s control. Think the 2008 Financial Crisis. The war with Iran is somewhere in between. Yes, President Trump can stop the bombing at any time and claim victory. But will Isreal and Iran end hostilities, too? We’ll keep watch.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
