2023-04-12 11:46:31 ET
Summary
- Energy prices fell to ease March 2023 CPI inflation.
- Clothing and automotive (new vehicle) prices rose.
- Will inflation go down in 2023?
Markets anticipated the CPI report weeks before its release. The S&P 500 ( SPY ) climbed from a 3,800 early March low to around 4,100. Nasdaq ( QQQ ), which is more sensitive to inflation rates, added almost 1000 points to around 12,050, up 7.7% in the past month.
Consumer inflation eased last month while the Bureau of Labor Statistics posted core inflation, a more meaningful figure, at 5.6%. This met market expectations.
What does CPI Measure?
Before reviewing what CPI measures, consider core CPI. According to the Federal Reserve Bank of San Francisco , core inflation excludes food and energy prices. They're sensitive to price changes. Since those are more volatile, the Fed heavily considers core CPI when setting its interest rate policy.
For the benefit of novice readers, the BLS measures CPI as the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. In March, CPI-U (CPI for all urban consumers) increased by 0.1% month-over-month . Prices rose by 5.0% in the last year. The precisely 5% CPI figure is significant. It almost matches the target Fed Funds rate for the first half of 2023, albeit in the range of 5.1% to 5.6% ( page 2 ).
In the table above, the median Federal funds rate for 2023 is 5.1%.
Markets are jubilant about the CPI figure because it's slightly below the interest rate target. This suggests interest rates will stop rising after the May 2023 meeting. Although the Fed said it would cut rates no earlier than 2024, markets are betting otherwise. Still, the central tendency Fed funds rate range is 3.9% to 5.1%.
The Fed notes that the central tendency excludes the three highest and three lowest projections for each variable in each year.
ETFs to Buy on Easing Inflation
Investors may buy the S&P 500 SPY ETF. The Vanguard S&P 500 ETF ( VOO ) is more attractive on its 0.03% management expense ratio. Apple ( AAPL ) is VOO's top holding at 6.60% of the fund . This may hurt the ETF's performance. Apple computer shipments fell by 40.5% in the first quarter year-on-year .
Microsoft ( MSFT ) is VOO's next biggest holding. The stock is Morgan Stanley's top 30 picks for 2025 at position #17 . Investors seeking a discount should wait for the hype in ChatGPT to ease. Consider waiting until after its fiscal third quarter financial report on April 25, 2023 , before increasing an MSFT or VOO position.
Why Inflation Slowed Down
Energy prices fell sharply by 3.5%. It's down 6.4% for the year. The Fed's higher interest rates in the last year have a lag effect. It's slowing the economy, causing energy demand to fall. Unfortunately, global politics and policies are beyond the Fed's control. On April 2, 2023, OPEC+ announced a surprise oil output cut .
Investors should anticipate energy prices rising again, undermining the favorable slowdown in inflation. This suggests that energy is still a buy since Feb. 2023 . The best three energy stocks to hold are ConocoPhillips ( COP ), Chevron ( CVX ), and Exxon ( XOM ).
Energy stock scores (SA Premium)
Those three energy firms have weak valuation scores. Energy investors already are anticipating higher oil prices in 2023. This will accelerate profit margin expansion for the firms. As a result, the three companies will continue to score an A+ on profitability. The growth grade will improve from D.
Where Inflation Increased
Commodities less food and energy commodities increased by 0.2%. Add mining companies poised to benefit from higher base metal costs. This includes Cleveland-Cliffs ( CLF ), which hiked steel prices five times this year . Copper prices might hit a new record high, according to Trafigura . This will lift Freeport-McMoRan's ( FCX ) profits.
New vehicle prices increased by 0.4% for the month and by 6.1% for the year. Investors already bid up shares of Ford ( F ) and General Motors ( GM ). According to Stockrover research, Ford's seasonal strength begins this month.
Ford stock seasonality (stockrover)
Lithium mining stocks do not share the same bullishness as EV suppliers. Albemarle ( ALB ) and Lithium Americas ( LAC ) are on a year-long downtrend. The overall health of premium-priced EVs, along with Ford trucks and GM vehicles is unknown. Dealerships continue to add inflation-adjusted charges, whose price increase shows up on the CPI report.
Apparel prices increased by 0.4%. The apparel retail sector will need people working at home less often. Until then, companies like The Gap ( GPS ) will struggle. TJX Companies ( TJX ) has better prospects since it sells premium brands at a discount.
Will Inflation Go Down in 2023?
Inflation should still fall throughout this year. Future reports will benefit from comparisons to higher inflation rates last year.
In this report, the March CPI data benefited from a pause in energy inflation. Sustained or higher inflation in 2023 risks loom. Investors should monitor oil prices regularly. They need to fall for inflation to go down in 2023.
For further details see:
Why March 2023 CPI Inflation Rate Eased