The October reading of the Consumer Price Index (CPI) published on Wednesday presented investors with another month of inflation data that’s well outside the Federal Reserve’s targeted range and one more sign that inflation is proving more persistent than transitory.
The longer inflation lasts, the more it will affect inflation-sensitive assets. Obviously, some sectors are negatively levered to this trend, while some are proving remarkably sturdy against the backdrop of inflationary pressures. That includes energy and income-generating energy assets such as the VanEck Vectors Energy Income ETF (EINC).
“The Consumer Price Index rose to 6.2% in October from year-ago levels, the largest such increase since 1990. The latest boost extends a months-long trend and added to the chatter about the surprising scope and staying power of rising prices,” says Morningstar analyst Lauren Solberg. “Energy, food, and vehicles drove the bulk of the increase.”
Midstream energy assets have track records of proving durable when inflation runs hot, and the group offers the income investors need to retain and expand purchasing power and portfolio returns when the CPI soars. For its part, EINC yields north of 4% and is higher by 39% year-to-date.
“Energy continues to be a key factor driving inflation higher. Based on prices in the oil futures, traders believe oil prices will continue to march higher, keeping overall inflation on an upswing,” adds Solberg. “When it comes to higher oil prices–which translates to loftier tabs at the gas pump–the underlying cause is a supply-demand imbalance.”
EINC tracks the MVIS North America Energy Infrastructure Index. That’s a basket of midstream energy companies, including master limited partnerships — a high-dividend asset class — as well as operators engaged in the processing, storage, and transportation of energy commodities.
While it’s possible that energy prices will decline, as Morningstar expects will happen, that doesn’t mean that EINC will fall out of favor. First, it’s a matter of when that will happen, and with supply chain issues showing no signs of abating, it could be a while before oil prices fall in earnest. Second, even if inflation rapidly declines over the near-term, bond yields are likely to remain unattractive, perhaps highlighting EINC’s tempting dividend yield in the process.
Bolstering the case for EINC, regardless of when inflation eases, is the fact that midstream energy companies are increasingly prioritizing balance sheet strength, which is supportive of future payout growth.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.