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Just because inflation readings are currently low does not mean that inflation is not present in the system. To understand our viewpoint in this regard, let’s first examine some of the more common readings of inflation.

  • Consumer Price Index - measures prices of a selection of goods and services purchased by a typical consumer.
  • Core Price Index – the most well know measure of inflation that excludes food and energy prices, due to their volatile nature.
  • Producer Price Index - measures average changes in prices received by domestic producers for their output. Additionally, the Producer price index measures the pressure being put on producers by the costs of their raw materials.

Most of the mainstream media outlets, in addition to the Federal Reserve itself, focus on core inflation readings. We think that this approach could be very misleading because mainstream America does not have the luxury of excluding food and energy from their everyday lives. Hence, if food and energy prices are rising (and not being picked up by the core inflation readings), Americans are likely to have less disposable income, unless commensurate increases in wages occur to offset the price increases. Less disposable income generally leads to lower overall consumer sentiment/confidence which translates into lower consumer spending. Lower levels of consumer spending could prove to be a major headwind to this economic recovery as consumer spending accounts for over 70% of U.S. Gross Domestic Product (GDP) growth.

The question then becomes to what extent have energy and food prices risen thus far in 2012? To answer these types of commodity oriented questions, we, at Hennion & Walsh, often turn to the Exchanged-traded product (ETP) universe. Below, is a selected listing of agriculture and energy ETPs and their respective 2012 Year-to-Date (YTD) return from ETF Database.

Agriculture ETPs

Ticker

Name

2012 YTD Return%

CORN

Teucrium Corn Fund

-3.53%

SOYB

Teucrium Soybean Fund

+5.89%

WEET

iPath Pure Beta Grains

+2.70%

WEAT

Teucrium Wheat Fund

-7.19%

FUD

UBS E-TRACS CMCI Food Total Return ETN

+2.73%

Energy ETPs

Ticker

Name

2012 YTD Return%

USO

United States Oil Fund, LP

+6.45%

UGA

United States Gasoline Fund, LP

+19.29%

UNG

United States Natural Gas Fund, LP

-29.10%

UHN

United States Heating Oil Fund

+11.38%

DBE

PowerShares DB Energy Fund

+11.66%

Please Note: Data sourced from ETFdb as of March 19, 2012. Past performance is not an indication of future results. Hennion & Walsh Asset Management currently has allocations to DBE in several of its managed money portfolios.

A review of these selected data points would suggest the price inflation is occurring thus far in 2012, although to a much greater extent in energy than agriculture. Similar price pressures are being experienced in the industrial (Ex. Aluminum and Copper) and precious metals (Ex. Gold and Silver) markets.

We still contend that inflation is anxiously waiting in the wings (though not an immediate concern) despite the pullback in several commodity prices that occurred late in 2011 and the contentions by many market analysts that certain commodities may be due for a further correction. As a result, investors may want to consider reducing allocations to Commodities in their investment portfolios for 2012 from the levels they had set in 2011, but we would not recommend retreating entirely from Commodities as an asset class. Despite a slowdown in overall economic growth rates in China, in our view, worldwide demographic trends related to population growth will continue to place supply pressures on several commodity types with supply capacity issues, notably agriculture and energy based commodities, while periods of market volatility will likely result in continued investor appetites for precious metals.

Source: Don't Wait Too Long To Inflation-Proof Your Portfolio