The CPI Jumps, But is Inflation a Real Threat to the Dow Jones Industrials?

The Consumer Price Index rose sharply in May, but is inflation back for good?

Jun 17, 2014 at 12:30PM

The Dow Jones Industrials (DJINDICES:^DJI) were moving in an aimless manner on Tuesday, up just 14 points as of 12:30 p.m. EDT. After substantial gains over the past few months, stock investors seemed more inclined to avoid making major commitments to the market as they weigh countervailing factors in the economy. One of those factors gave investors a shock this morning, as May's Consumer Price Index reading rose 0.4% from the previous month, making some nervous about an upsurge in price pressures. Yet before making big conclusions about the impact of inflation readings on the Dow, it makes sense to take a closer look at the report and go beyond the headline figures.

The Fed must deal with inflation concerns. Source: Wikimedia Commons.

Why prices rose
The CPI's May gain was the biggest since early 2013. But as troubling as the rate of the CPI increase might be, what's potentially more problematic is the fact that the index's gains weren't tied to particularly huge increases in any one sector. Food prices rose 0.5%, with those consumers who were trying to economize by eating in facing an even steeper 0.7% increase. Energy costs rose 0.9%, with price increases for gasoline and electricity more than offsetting lower costs for natural gas. Even when you take out those volatile components, core inflation rose 0.3% for the month.

From a longer-term perspective, the inflation rate appears to be moving high enough to counter any fears among Federal Reserve officials about deflation. With a year-over-year change in the CPI of 2.1%, the index is actually above the 2% Fed target for the first time since late 2012. Even core inflation rose at a 2% annual clip, indicating that while the Fed has met its goal of keeping price increases on target, it will have to make sure that no further upward momentum carries prices even higher.

Source: Delta Air Lines.

That could prove difficult in certain markets. Prices of beef, pork, and eggs are up double-digit percentages from year-ago levels, and fresh fruits have seen substantial increases as well. In addition, airline fares jumped almost 6% on a seasonally adjusted basis for the month, supporting the strength in the Dow Jones Transportation Index (DJINDICES:DJT). Delta Air Lines (NYSE:DAL) has had some success this year in initiating fare increases, and with capacity at relatively tight levels, airlines have been able to make increases stick in many cases.

For now, a single month's reading of the Consumer Price Index shouldn't shake confidence among investors in the Dow Jones Industrials. For the most part, the Dow's components have enough pricing power to push through cost increases to their customers. From a longer-term perspective, if monthly increases of this size repeat, then it'll be time to start worrying about inflation's impact on the Dow's bull market.

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information