On Friday, investors will get their first indication of how the recent spike in energy prices is impacting inflation. This first look will come from the Bureau of Labor Statistics' release of March Consumer Price Index data. It will be published at 8:30 a.m. ET, April 10, before the stock market opens.
Needless to say, because this is the first data on how the war in the Iran and the subsequent spike in oil prices have affected inflation, the report is much anticipated. A sudden jump in crude prices, as we saw in March after the U.S. and Israel first waged war on Iran, affects inflation in several ways. Most visibly and directly, that's at the gas pump. The current national average price for a gallon of regular gasoline is $4.12.
Let's see what this could all mean for investors and what they should do.
The energy price spike can decrease consumer spending on other products and services
The price just before the conflict began was $2.92. So, consumers are now spending about $1.20 per gallon -- or 41% -- more to fill up. Sure, some companies, like oil majors and refiners, are benefiting from higher oil prices, but the benefits are not spread throughout the economy. And that price increase subtracts from the funds that Americans would spend elsewhere.
Image source: Getty Images.
The spike in crude prices indirectly affects other prices in the economy, from fertilizer to manufactured goods and groceries, as they embed higher transportation and energy costs. The price of urea, a nitrogen fertilizer, rose 35% in March. Such an increase will inevitably push up prices at the supermarket. Yet because the U.S. economy is more energy-efficient now than during previous energy crises, economists aren't exactly sure what the impact will be. Thus, this CPI report is even more critical and could move the market dramatically.
According to market and economy watcher Ed Yardeni, every major spike in crude oil prices has sent headline inflation higher. The Cleveland Federal Reserve Bank estimates that inflation rose 3.25% year over year in March and 2.6% when you strip out more volatile food and fuel prices. Those are well above the Fed's 2% target.
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So, expect a higher read for March inflation when the Friday report comes out. And if you're looking to protect your portfolio from rising inflation, consider energy stocks (which are rising as oil prices rise), as well as precious metals, which have historically been a hedge against rising inflation. The Vanguard Energy Index Fund ETF (VDE 0.52%) provides low-cost, comprehensive exposure to stocks in the oil and gas sector.
And the Invesco DB Precious Metals Fund (DBP 1.32%) is an index composed of futures contracts on gold and silver.
