Inflation Threatens

Includes: IYR, SPY, WMT, XLE, XOM
by: Markos Kaminis

Inflation threatens dear friends, so perhaps we had better welcome the chatter found within the Fed minutes last week. The latest reports measuring prices would seem to portend that inflation threatens, and as we all know, too much of it is really bad for the flavor of our stock cocktail.

The week just passed offered measures of prices at the producer point and at the consumer level. Though, inflation might be more appropriately associated with a consumer culling. The Consumer Price Index (CPI) for January, my dear chums, showed no change on the headline. The CPI was quite the appeaser, allowing for gains in even the shares of retailers warning about the future, i.e. Wal-Mart (NYSE:WMT) on Thursday. Though, the SPDR S&P 500 (NYSEARCA:SPY) and other index measures were acutely affected by the message of the FOMC meeting minutes.

WMT, the universal measure of consumer well-being these days when nearly all of us are poor, saw its shares gain 1.5% on the day Thursday; and the nation's leading retailer held green ground Friday as well. Though Wal-Mart indicated that the trouble is that while those in the higher classes are benefiting from a housing revival and stock market celebration, the poorer class continues to suffer. If the poor suffer, so will WMT, and so wise is the concern expressed by the executives and some investors. Indeed, Wal-Mart joined Burger King (BKW) and Zale (NYSE:ZLC) in offering this same message about America's poor. At the same time, though, Wal-Mart reported solid results.

So what's to fear if inflation, as measured by the CPI, is null and void anyway? Ah, but what of the Core CPI, the measure of inflation that excludes those pesky and volatile food and energy prices, which only serve to get in the way of a proper vista? Let's keep this between ourselves, but the Core CPI showed a scandalous 0.3% increase in prices in January. Make no mistake, that's a big monthly move, and so the year-over-year measure read +1.9%. That is still below the point where the Fed really gets edgy, but if such a month-to-month pace were to prove trendy, then it would not be long before inflation more than threatened, but actually battered us.

Future inflation would certainly be supported by housing, which has been one of recent history's linchpins of deflation. The revival in real estate is well documented at this point, despite the latest homebuilder sentiment question. The iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR) certainly reflects it, up 5.4% year-to-date, not to mention its gains before the New Year. Price increase has been at this point accepted as the new trend, with the home price index at the FHFA showing a full year's worth of increase and S&P Case Shiller measures in agreement with the argument as well.

Future inflation might also get a lift from energy prices, which have been recently tamed by global economic recession, or less than bountiful growth for the lucky few like us. The latest action in the Energy Select Sector SPDR (NYSEARCA:XLE) certainly confirms our suspicion about the future though, with the XLE up 9.2% year-to-date. The performance of the large integrated oil companies like Exxon Mobil (NYSE:XOM) offers a consistent message as well, with XOM up 3.7% this year. Indeed, energy should do well if global economic recovery is not impeded by too much inflation.

The latest CPI data does not reflect our likely future in a global economic revival, with energy prices marked lower by 1.7% in January, on a 3.0% decline in gasoline. But one month does not a disaster make, and the outlook for the U.S. at least is for better growth this year and next. Shelter costs, however, were confirming our concerns about inflation, with those up 0.2% on the month and 2.2% over the last 12. Yet, we still have a long ways to go to get our money back post real estate collapse. Medical costs were also notable, with Medical Care Services up 3.6% year-over-year. So as to keep politics out of this article, we'll leave it to you to argue why that might be.

My friends, a little inflation is not at all bad, because it would simply be a symptom of healthy economic growth. However, if we find ourselves in a post Bernanke-Fed led frenzy of fiat currency flatlining, and inflation gets out of control, requiring disturbing interest rate hikes, then the news is not good for the economy nor is it celebratory for stocks. So, for all of our sakes, we hope inflation remains a threat and not a reality.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.