It seems as if nobody is worried about inflation anymore. Certainly not the bond market, as evinced by the 1.1% yield on the 10-year Treasury note. Nor the stock market, which is valuing profits many years in the future at almost no discount.

Helping to keep a lid on inflation was less spending which translated into a much higher national Personal Saving Rate (PSR) last year. In 2019, the rolling 12-month average for the PSR was 7.8%. During the second half of 2020, it was nearly twice that level at 14.9%.

To be sure, price inflation is the least of our worries right now. The coronavirus pandemic has driven the unemployment rate above 6%. It may be years until it gets back to its pre-pandemic level of 3.5%.

As a result, the U.S. Consumer Price Index (CPI) increased by only 1.4% over the past 12 months. At the rate, it would take 51 years for the cost of living to double.

However, even that “headline CPI” number for all items is misleading. Some prices have fallen dramatically while others have escalated rapidly.

Of the 200+ categories of items that CPI measures, the worst-performing one last year was airline fares which fell 18.4%. The second-worst was gasoline, which dropped 15.2% in price.

The best-performing category was used cars and trucks, up 10%. In second place were tobacco and smoking products, rising 5.1%.

The cost of food rose 3.8% last year. Some of that increase was due to higher production costs to comply with COVID-19 safety protocols.

Commodity Producers Overtake Tech Titans

Given all those data points, you might assume that commodity producers are taking it on the chin. When retail prices are flat, that makes it difficult for them to get manufacturers to pay more for the materials that go into their products.

Apparently, the stock market doesn’t care about that, either. Over the past twelve months, the Fidelity Global Commodity Stock Fund (FFGCX) has delivered a total return (share price appreciation plus dividends paid) of 23.4%.

During the same span, the SPDR S&P 500 ETF Trust (SPY) has returned 18.8%. In short, during the past year commodity stocks have significantly outperformed the mega-cap tech stocks that dominate the index.

I find that development both surprising and concerning. In large part, stock and bond prices are at record highs because inflation is believed to be dormant. If that’s true, commodity stocks should not be participating in the largesse.

To Fidelity’s credit, it has not attempted to skew the fund towards commodities that are faring better than others. The fund’s assets are equally divided among energy, agriculture, and mining stocks.

The fund’s top 10 holdings include oil “super-majors” Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM), and Total SA (NYSE: TOT). All three of those stocks lost ground over the past 12 months after oil prices cratered.

That means the fund’s other two categories of holdings, agriculture and mining, are picking up a lot of slack. The fund’s third-largest position in miner Rio Tinto Group (NYSE: RIO) has gained 64% over the past year. Its largest holding is Nutrien (NYSE: NTR), a Canadian crop fertilizer manufacturer, which is up 34%.

A Costly Dilemma

Even those numbers are a bit misleading. Until recently, commodity stocks were trailing the overall stock market. It was not until December 4 that the trailing 12-month performance for FFGCX finally overtook SPY (circled area in the chart below).

Commodity stocks surged in December as several COVID-19 vaccines were approved for distribution. That was especially true for energy companies, which benefit from rapidly rising oil prices in anticipation of the economy fully reopening.

That’s great news for oil producers but bad news for oil users. On a net basis, higher oil prices are a drag on the national economy. Everyone consumes energy, but only a small fraction of our workforce produces it.

Likewise, higher agriculture prices are good for farmers but bad for consumers. The same goes for higher gold, silver, and copper prices, which are used in the production in a wide variety of retail goods and commercial applications.

Here is the dilemma: at some point, rising commodity prices should translate into higher inflation. Either consumer prices will have to go up or profit margins for manufacturers and retailers will get squeezed.

Thus far, neither the stock nor bond markets seem to be recognizing that mathematical inevitability. But when they do, their reaction could be quick and severe.

That’s why, to protect your hard-earned wealth, you should consider dividend-paying stocks. When risks are mounting, dividend payers add ballast to any portfolio.

We’re especially keen on regulated, U.S.-based utilities stocks, which are excellent proxies for dividend growth. Utilities also should benefit from the White House’s “Build Back Better Recovery Plan,” especially in regard to clean energy initiatives. For our list of utilities stocks that are poised to thrive under the new Biden administration, click here now.

PS: If you have any profitable “success stories” from following our team’s investment advice, let’s hear about them! Send your correspondence to: mailbag@investingdaily.com.