Inflation Pressure Intensifying? ETFs May Help Stay Prepared

Since the Middle East war began on Saturday, oil prices have surged, reviving inflation concerns. Higher energy costs could fuel price pressure and complicate central bank policy decisions, further unsettling investors already on edge after a volatile start to 2026.

Attention has also turned to the Strait of Hormuz. With the key shipping route closed, the risk of supply disruptions has risen significantly, potentially pushing oil prices even higher. 

According to Reuters, fears of energy-driven inflation have prompted investors to delay expectations for the next Fed rate cut. Per CME FedWatch, as quoted on the Reuters article, the probability of a 25-basis-point cut at the Fed’s June meeting has dropped to around 32% from 47% a week ago and 75% a month ago.

Oil Prices and the Inflation Question

The main question for inflation remains the duration of the conflict. Given the sharp rise in energy prices and their importance for both inflation and economic output, a prolonged war in the Middle East could exert upward pressure on price levels.

According to Goldman Sachs, as quoted on Yahoo Finance, a sustained 10% rise in oil prices could add roughly four basis points to core CPI and about 28 basis points to headline CPI, potentially pushing year-over-year headline inflation back toward 3% if prices remain elevated for several months.

According to CNBC, although Washington has maintained that the military campaign will wrap up within weeks, some analysts caution that the United States could get drawn deeper into Operation Epic Fury if Iran’s regime proves more resilient than anticipated.

Rising Pressure on Consumers

With consumer confidence already down from the year-ago levels, as highlighted by Surveys of Consumers from the University of Michigan, rising inflationary pressure ahead could further complicate the outlook for consumers.

The University of Michigan’s Index of Consumer Sentiment fell 12.5% from a year ago, reaching 56.6 in February this year.

Additionally, rising national debt levels can further create economic headwinds, including the risk of elevated inflation. If the government decides to repay its debt by increasing the money supply, it risks devaluing the currency, pushing up the inflation level. Currently standing at $38.86 trillion, the U.S. government’s increasing national debt continues to create an income problem for investors.

Exploring ETFs

The potential for higher inflation and an uncertain Fed path warrants a more defensive investment approach. Given the uncertain outlook, adopting a conservative strategy in the near term may be prudent, as it is better to remain cautious than unprepared.

Below, we have highlighted a few ETF areas that investors may consider increasing exposure to as inflation risks rise, helping protect portfolios from potential economic headwinds.

Gold ETFs

Across extended investment periods, gold preserves its purchasing power, outpacing inflation. It is a valuable tool for portfolio diversification due to its historical tendency to have a negative correlation with other asset classes. Additionally, as investors flock to traditional safe-haven assets like gold amid ongoing Middle East tensions, allocating to the yellow metal may be a prudent strategy.

Investors can consider funds like SPDR Gold Shares GLD, iShares Gold Trust IAU and SPDR Gold MiniShares Trust GLDM.

Commodity ETFs

Increasing exposure to commodity ETFs can be a smart play to reduce overall portfolio risks when inflation is expected to rise. Commodities are often considered a hedge against inflation as they typically rise when inflation is accelerating and offer protection from the effects of higher prices.

Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC and Invesco DB Commodity Index Tracking ETF DBC can be considered.

Consumer Staples ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can allocate more money to consumer staple funds to safeguard themselves against potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.

Utility ETFs

The utilities sector, being capital-intensive, also benefits from reduced financing costs when interest rates fall. Additionally, as a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil.

Investors should gain from funds like Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU and iShares U.S. Utilities ETF IDU.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety, in the form of payouts, and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF VIG, Schwab US Dividend Equity ETF SCHD and Vanguard High Dividend Yield Index ETF VYM.

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This article originally published on Zacks Investment Research (zacks.com).

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