Inflation Keeps Reaccelerating

The Consumer Price Index comes in hot … rising oil prices are a key reason why … $100+ oil prices are now on the table … could those high prices…

The Consumer Price Index comes in hot … rising oil prices are a key reason why … $100+ oil prices are now on the table … could those high prices help stocks? … be careful who you listen to

Inflation is reaccelerating.

This morning, we learned that the Consumer Price Index (CPI) jumped 3.7% in August, topping the 3.6% estimate from Dow Jones economists. The month-to-month number came in at 0.6% which matched expectations.

The more important part of this morning’s data was the “core” CPI number which strips out volatile food and energy prices. Its year-over-year number came it at 4.3%, matching estimates. But on the month, its 0.3% gain topped the 0.2% estimate.

Here’s a visual from CNBC showing a marked U-turn for the headline CPI number since June (dark blue). Meanwhile, core CPI (light dotted blue) continues edging lower.

Source: US Bureau of Labor Statistics / CNBC

Though this morning’s data came in slightly above forecasts, it’s unlikely to prompt another rate hike from the Federal Reserve next week since it wasn’t blazing hot.

The going assumption has been that the Fed will hold rates steady when it convenes its September policy meeting one week from today. As I write Wednesday in the wake of this morning’s CPI data, that’s still the expectation. We can see this by looking at the CME Group’s FedWatch Tool, showing a 97% probability of a pause next week.

Turning to the specifics of this morning’s CPI data, while shelter costs continue to be a major driver of inflation, last month brought a new source of higher prices – energy.

Overall energy prices climbed 5.6% in August, part of which came from a 10.6% jump in gas prices.

The issue now is whether higher oil prices will continue to fuel hotter inflation data this fall – and if so, what that will mean for Fed policy.

Are we headed for $107 oil?

As we’ve detailed here in the Digest, today’s higher oil prices have been engineered. They’re a result of reduced supply from Saudi Arabia and Russia, rather than increased global demand.

For example, last week, Saudi Arabia announced it will extend its voluntary 1-million-barrel-per-day supply cut through the rest of 2023. The expectation was for a one-month extension, so committing to cuts through December caught the market by surprise. The news spiked the price of West Texas Intermediate Crude (WTIC) and it hasn’t stopped climbing.

As I write Wednesday, a barrel of WTIC costs more than $89. This is the highest price since last November, and 30% more expensive than early-June.

Meanwhile, the price of Brent Crude (the European standard) is nearly $92. But if Goldman Sachs is right, that’s headed to $107.

From CNN Business:

Oil prices could climb well into triple-digit territory by next year if Russia and Saudi Arabia don’t unwind their aggressive supply cuts, Goldman Sachs warned its clients…

First, Goldman Sachs expects Saudi oil supply to be 500,000 barrels per day smaller than previously anticipated. That alone should add $2 to the per-barrel price of oil.

Secondly, Goldman Sachs warned that some of its assumptions for oil production may be incorrect if the OPEC+ cut extensions continue…

“Consider a bullish scenario where OPEC+ keeps the 2023 cuts…fully in place through end-2024 and where Saudi Arabia only gradually raises production,” analysts at Goldman Sachs wrote in the report.

In that scenario, Brent oil prices would likely climb to $107 a barrel in December 2024, the bank said.

Ignoring the case for $107 oil, the balance between supply and demand is so tight that any disruption will send oil’s price higher

That’s the point legendary investor Louis Navellier stressed to his Platinum Growth Club subscribers in yesterday’s September Live Chat Event.

Here’s Louis:

We can’t have any disruption in the global supply chain…

We’ve had the biggest drop in oil inventories ever recorded since records began.

If one of Russia’s oil pipelines breaks – their pipelines are very vulnerable – it will screw up all kinds of production. We have a very serious hurricane in the Atlantic. There’s another one right behind it.

If you get any kind of hurricane in the Gulf of Mexico, it’s going to disrupt production, so we could have a spike in crude oil prices because of that.

Political maneuvering could keep oil prices elevated longer than expected

As we noted in the Digest last week, one of the prevailing theories about the Saudi motivation to reduce oil supply boils down to politics.

As the theory goes, the Saudis and the Russians want President Biden voted out of office. By inflating the price of oil via supply cuts, it’s likely to increase prices at the gas pump in the leadup to the November presidential election. Voters often punish the president for such a situation.

Here’s Fortune:

The price of crude oil could soar into the triple digits by the end of next year, potentially affecting American’s choice at the ballot box.

And this comes from Financial Times:

Pump prices tend to play an outsized role in voter perceptions of the economy. And analysts say a tightening oil market could propel crude to $100 a barrel before the end of the year – pushing fuel costs higher just as inflation begins to ease in western economies.

“The danger for the White house is that rising gasoline prices have the power to reverse the sense that the situation is improving and inflation is coming down,” said Richard Bronze, co-founder of consultancy Energy Aspects.

Keep in mind, in his effort to reduce gas prices, President Biden has already drawn down the Strategic Petroleum Reserve by nearly 300 million barrels since he took office. This national reserve stockpile stands at its lowest level in 40 years.

Biden will face significant political opposition if he seeks to continue selling down the oil reserves for points with voters – especially since his prior plan was to refill it if/when prices fell below $80. Prices have been well below $80 for most of this year, yet there’s been no material replenishing effort. Energy experts suggest it will take years to replenish the reserve at this point.

But while elevated oil prices could be bad news politically, they could be good for your portfolio, even if you don’t own oil stocks

That’s what our hypergrowth expert Luke Lango believes.

In Luke’s Daily Notes from his newsletter Innovation Investor, he explains that rising oil prices will cause reinflation in the headline CPI number (what we saw this morning). But it won’t cause reinflation in the core CPI, since that figure stripes out volatile energy and food prices.

Importantly, the Fed is less interested the headline number. Its policy decisions stem from core data. On that note, Luke writes that his analysis of leading indicators of core CPI – including job quit rates, money supply growth, supply chain pressures, home prices, rents, and more – suggest core inflation will keep dropping for the next six to 12 months.

With this context, let’s go to Luke:

The trend right now is not broad reinflation. It is headline reinflation with continued core disinflation.

That’s actually a bullish setup for stocks…

So long as core inflation keeps falling, [the Fed] won’t hike rates again, even if headline inflation rates are reinflating a bit…

Meanwhile, rising oil prices will lead to rising gas prices, a drop in consumer confidence, a slowdown in consumer spending, and ultimately, lower core inflation down the road. Rising oil prices today will also enhance recession risks in 2024, and therefore, could shift forward the timeline for rate cuts next year.

In other words, the current macroeconomic dynamic of still-falling core inflation with some headline reinflation is a bullish combination for stocks.

That certainly would be a “best of both worlds” – up to a point. As we’ve noted here in the Digest, reduced consumer spending is good as long as it doesn’t snowball into a recession.

Before we sign off, oil’s price action is an important reminder of the importance of maintaining a balanced portfolio

As it looks today, we’re on our way toward $100 oil.

Did you see this coming?

As recently as June, at least one analyst didn’t, calling the notion “pie in the sky.”

On June 6, when oil traded at less than $72 a barrel, one analyst quoted by Yahoo! Finance said:

The best they can expect here is to stabilize the price [of oil] or manage the decline. Talk of 100-dollar oil is pie in the sky, quite frankly.

Well, here we are, roughly 24% higher in only three months, and not only is $100 oil on the table, $107 oil is being discussed.

Imagine you’d listened to this analyst and sold your oil and gas holdings (for ease, let’s say XLE, which is the Energy Select Sector SPDR ETF). You’d have missed out on 18% gains and counting, while the S&P is up just 5% over the same period.

Chart showing XLE up 18% since early June when an analyst said oil wasn't going any higherSource:

Circling back to Louis, regular Digest readers know that he’s been an energy bull for over a year. This has enabled his subscribers to lock in a series of big wins with their energy bets.

But when oil prices didn’t climb as high as had been expected earlier this summer, that raised questions about whether the energy trade was still a wise investment.

Well, as oil sets new highs for 2023 and the forecast of $100+ oil is a real possibility, it’s a good reminder that fidgeting with your portfolio based on every pundit prediction and market ebb/flow is a great way to underperform.

Instead, history suggests a balanced portfolio of fundamentally strong stocks is the wiser strategy – even with the inevitable sector drawdowns that are just a part of investing.

Here’s Louis:

The seasonal surge in energy prices came a little later than we all wanted, but it did occur.

I’m really proud of our refining stocks, our integrated energy stocks.

And now, because of the very tight supply/demand imbalance, I think we can be very comfortable with our integrated energy bet.

Congrats to Louis’ subscribers on hanging in there with their big energy bet. As it looks today, it’s going to offer a handsome payoff.

Have a good evening,

Jeff Remsburg

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