ETF Strategies to Tackle the Rising Inflation Levels

Inflation levels continue to rise in the United States. According to the Commerce Department, another major inflation indicator, core personal consumption expenditures (PCE) price index, used by the Federal Reserve to set policy, climbed 3.4% year over year in May, per a CNBC article. Notably, it registered the biggest gains since April 1992 and was on par with Wall Street estimates. Going on, the PCE index was up 3.9% for the year and 0.4% for the month after including volatile food and energy prices, according to a CNBC article.

There are many factors that have led to the rise in inflation levels. Rising raw material prices due to supply-chain disruptions made it difficult for manufacturers to meet the increasing demand as the global economies reopened, per a CNBC article. Moreover, rising real estate prices have been a reason for the increasing inflation levels.

Furthermore, the annual inflation rate has accelerated to a higher-than-expected 5.0% in May. Excluding volatile food and energy prices, the "core" consumer price index (CPI) rose 3.8% year over year, without seasonal adjustment. It marked the largest one-year increase since the period ending June 1992.

Notably, investors kept the Wall Street rally tight in the recent past, largely due to their growing concerns over the rising inflation levels. They were worried that increasing inflation may hurt corporate margins and profits. They also feared that this persistent escalation in inflation may put pressure on the Federal Reserve to tighten monetary policy, according to a CNBC article.

Going by a CNBC article, Fed Chairman Jerome Powell has however remained bullish on the economic recovery achieved so far from the pandemic-led slump. He also maintained that high inflation levels were temporary and will return to 2% over the long term, per the same article.

The central bank now expects inflation to jump to 3.4% this year, higher than its previous forecast of 2.4%. PCE inflation expectation has gone up to 2.1% for 2022 from 2% projected in March and to 2.2% for 2023 (from 2.1%). This has flared up talks of a faster-than-expected rate hike. However, the Fed has signaled two rate hikes by the end of 2023 amid higher inflation.

Considering the current scenario, let’s take a look at some ETF areas that can offer good plays to combat rising inflation levels:

The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation. Moreover, rising inflation often lowers the value of the concerned currency. If the greenback remains subdued, gold will gain some glitter back. Also, analysts at the Morgan Stanley (NYSE:MS) expect the yellow metal to maintain prices above $1,700 an ounce through the second half of the year, as mentioned in a Bloomberg article.

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares (NYSE:GLD) Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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Written By: Zacks Investment Research