Inflation in the United States was steady last month as the Consumer Price Index rose 3.7% year over year, flat compared with the August level. Although inflation is still significantly above the Federal Reserve's 2% target, it has dropped from a peak of 9.1%. On a month-over-month basis, inflation decelerated from 0.6% to 0.4%.

Several Fed officials in the past week have signaled that higher long-term rates could help cool the economy, lessening the need for the central bank to further raise its key short-term rate.

A steady inflation rate suggests that the U.S. economy is showing resilience and that the current economic policies might be working as intended, without causing any drastic shifts in the cost of living. We have highlighted ETFs from five sectors that will benefit from steady inflation or an improving economy. These include Consumer Discretionary Select Sector SPDR Fund, Technology Select Sector SPDR Fund, iShares U.S. Home Construction ETF, and First Trust Nasdaq Food & Beverage ETF.

Behind the Inflation Numbers

Shelter was the biggest factor for the September consumer price rise, accounting for more than half the increase in CPI. The shelter index, which accounts for two-thirds of the inflation index, accelerated 0.6% in the month and 7.2% from a year ago. In particular, rental prices rose 0.5% on a monthly basis for the second straight month. On a year-over-year basis, rental costs rose 7.4%, less than the 7.8% rise in August.

Energy costs rose 1.5% over the past month, including a 2.1% increase in gasoline prices and 8.5% in fuel oil. Food prices were up 0.2% for the third month in a row. On a 12-month basis, food costs climbed 3.7%, including a 6% increase for food away from home.

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 4.1% year over year, down from the year-ago level of 4.3% increase. This is the smallest annual increase in two years.

ETFs to Gain

Consumer Discretionary Select Sector SPDR Fund (XLY)

Lower inflation often translates into higher purchasing power for consumers, thus boosting the performance of the consumer discretionary sector. The companies sell non-essential goods like apparel, automobiles and entertainment. When consumers have more disposable income, they spend more on these types of goods and services. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $16.7 billion and an average daily volume of around 5 million shares.

It offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. Consumer Discretionary Select Sector SPDR Fund holds 52 securities in its basket, with key holdings in automobiles, broadline retail, hotels, restaurants and leisure, and specialty retail with a double-digit allocation each. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 (Strong Buy).

Technology Select Sector SPDR Fund (XLK)

Tech companies, particularly in the growth segment, are often financed with significant debt, making them sensitive to interest rates. When inflation cools and interest rates are lower or stable, these companies can borrow more cheaply to finance their growth. This can support increased profitability and higher stock prices. As such, XLK seems a prudent choice.

Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 64 securities in its basket and has key holdings in software, technology hardware, storage & peripherals, and semiconductors & semiconductor equipment. Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $49 billion and an average daily volume of 6 million shares. The fund charges 10 bps in fees per year and has a Zacks ETF Rank #1.

iShares U.S. Home Construction ETF (ITB)

Homebuilder ETF will get a dual advantage from steady inflation and a higher shelter cost. iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With an AUM of $2 billion, it holds a basket of 46 stocks, with a heavy concentration on the top two firms. iShares U.S. Home Construction ETF charges 40 bps in annual fees and trades in a heavy volume of around 4 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 (Buy).

First Trust Nasdaq Food & Beverage ETF (FTXG)

Food prices have been on the rise though slightly. This implies that food producers and retailers have been able to pass on higher costs to consumers, which is beneficial for their profitability. Additionally, if cooling inflation leads to stable or lower interest rates, it could reduce borrowing costs for food companies, making it cheaper for them to finance their operations or invest in growth.

First Trust Nasdaq Food & Beverage ETF offers exposure to U.S. companies within the food and beverage industry. It tracks the Nasdaq US Smart Food & Beverage Index, holding 31 securities in its basket, with each accounting for less than 9% share. First Trust Nasdaq Food & Beverage ETF has AUM of $103 million and charges 60 bps in annual fees. It sees an average daily volume of about 731,000 shares and has a Zacks ETF Rank #3 (Hold).

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