The inflation monster is grievously wounded, but not dead yet. In Hollywood lingo, a sudden out-of-nowhere shock in a horror movie is called the “jump scare.” Inflation appears to be dying, but it could still give investors a jump scare.

Liquidity is manna for the markets. Wall Street will remain jittery until inflation moves closer to the Federal Reserve’s target of 2% and we get a definitive picture of the central bank’s intentions on monetary tightening.

Below, I examine the latest inflation data. I also steer you towards an asset class that provides both reliable income and a defensive hedge against inflation.

We got some (qualified) good news on inflation Thursday, but we’re still not out of the woods.

The Bureau of Labor Statistics reported Thursday that the consumer price index (CPI) rose 3.2% year-over-year in July, a small uptick from 3% in June that was expected by the consensus of analysts. Shelter/rent accounted for a disproportionate amount (90%) of the increase.

The most encouraging news is that CPI climbed a modest 0.2% for the month of July alone, yet another sign that inflation is moderating. The chart tells the story:

Source: The U.S. Bureau of Labor Statistics

More importantly, the “core” CPI, which excludes volatile food and energy components and which the Fed scrutinizes more closely, remains elevated. The core figure rose by a modest 0.2%, the same as in June, leaving the year-over-year increase at 4.7%, versus June’s 4.8% rise.

Thursday’s CPI numbers aren’t encouraging enough for the Fed to declare mission accomplished in its fight against inflation, but they still represent a substantial pullback from June 2022, when annual inflation peaked at a 40-year high of 9.1%.

Inflation is falling, but the rate of that descent is likely to decelerate as energy prices continue their rebound in the latter part of 2023. Unexpectedly strong global economic growth, combined with production cuts imposed by OPEC+, are tailwinds for crude oil prices.

Saudi Arabia, de facto leader of the oil cartel, and its partner Russia are intent on maximizing revenue and, as an ancillary goal, punishing the West for what the two countries view as hypocrisy on human rights.

The Biden White House views each OPEC+ production cut as a stick in the eye. The upshot is that crude oil probably will continue cruising higher this year, despite inroads made by renewables.

On Thursday, the main U.S. stock market indices closed mostly higher, as follows:

• DJIA: +0.15%
• S&P 500: +0.03%
• NASDAQ: +0.12%
• Russell 2000: -0.42%

Investors interpreted the CPI report for July as generally favorable. Easing CPI growth also buttresses the “soft landing” narrative.

Shelter from the storm…

Wall Street’s preoccupation with inflation data and Fed policy underscores the dangerous undercurrents beneath this year’s stock market rally. But dividend stocks provide (to borrow a line from Bob Dylan) shelter from the storm.

Dividend-paying stocks help hedge against inflation. On average, dividends have accounted for 41% of the S&P 500’s return since the 1940s, a ratio that increases during decades with higher inflation.

It’s wise to invest in dividend stocks for several different reasons. For starters, if a company can dole out consistent payouts, it reflects inherently strong fundamentals.

Then there’s the magic and power of compounding: The systematic reinvestment of dividends over five years, 10 years, or longer is one of the best ways to build truly enduring wealth.

Another reason to invest in dividend stocks is dividend growth. Too many income investors narrowly focus on current yield. But over time, dividend growth becomes a far more important contributor to both income and wealth generation.

On the wealth-building front, a rising payout really starts to accelerate the compounding effect. And on the income front, your paycheck is getting fatter year after year.

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Finally, steady stream of dividends can help offset some of the anxiety from falling share prices. After all, you’re getting paid to wait for better times ahead.

If you’re reinvesting your dividends during a downturn, you’re being given new capital with which to pick up additional shares on the cheap. And if you’re investing largely for income, you’ve still got money flowing into your brokerage account, while investors in stocks that pay no dividend get nothing but agita.

All of which brings me to my colleague, Robert Rapier.

Robert Rapier is chief investment strategist of our premium advisory, Utility Forecaster. He’s the “income guru” on the Investing Daily team, and no one understands dividend stocks better than Robert.

After painstaking research, Robert found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of piddly payouts, Robert has the remedy. Click here for details.

John Persinos is the editorial director of Investing Daily.

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