💸 Inflation bites

Inflation Is Heating Up Again. Wall Street Is Finding Shelter in Dividend Payers

Wall Street's hopes for lower interest rates just ran headfirst into another inflation problem. September's hotter-than-expected report sent Treasury yields climbing and revived the prospect of another Federal Reserve rate hike. With borrowing costs threatening to stay higher for longer, investors are turning to dividend-paying stocks.

Hotter than hoped: Inflation picked up again in September, pushing the annual rate to 3.7% as consumer prices rose faster than they did in August. Gasoline accounted for more than half the monthly increase, although the price pressures weren't limited to the pump. Even core inflation, which excludes food and energy, came in above Wall Street's expectations. That gave investors another reason to worry that interest rates could stay elevated for longer.

• The odds of an October Fed rate hike jumped to nearly 40% from 22% a day earlier, with traders also betting on a possible December increase.
• The 10-year Treasury yield shot above 5.3% within minutes of the inflation report, having stood at 5.19% just before its release.

Consumer Staples Lead the Climb

Higher rates squeeze consumers and make it costlier for tech companies to fund massive AI buildouts, leaving retail, software, and semiconductor stocks lagging. Investors instead turned to defensive sectors like consumer staples, where demand for food and toiletries holds up even as prices rise. Dividends made these safer bets more attractive (opens in a new tab), with the Consumer Staples Select Sector SPDR ETFXLP yielding 2.6% and telecom giant AT&TT offering 4.9%.

• WalmartWMT, Coca-ColaKO, and Procter & GamblePG led consumer staples higher as investors favored everyday essentials.
• UnitedHealthUNH, AmgenAMGN, and MerckMRK ranked among the Dow's top performers, while other healthcare names also gained.

Hot print, slow hike: Economists agree inflation isn't cooling fast enough, but they're split on when the Fed might act. RSM US chief economist Joseph Brusuelas expects policymakers to wait until December, while Capital Economics' Stephen Brown sees an October hike back on the table. With that uncertainty hanging over the market, Matrix Asset Advisors' David Katz favors overlooked consumer names like Home DepotHD and McDonald'sMCD. When even the Fed's next move is anyone's guess, a boring dividend check starts looking pretty exciting.

Social Security Checks Rise 3.6% as Medicare Takes a Smaller Bite

Retirees are about to get a bigger check from Washington, though Medicare is also reaching for a slice. Social Security benefits rise 3.6% next year (opens in a new tab), giving retirees their biggest raise in 4 years at a time when household budgets remain under pressure. The increase is tied to September's inflation report, which showed prices picking up again as gasoline costs surged.

• The Social Security Administration says 76M Americans will receive higher Social Security benefits and Supplemental Security Income payments next year.
• Per the Senior Citizens League, the average retired worker will get roughly $75 more per month, bringing the typical benefit to about $2.16K before Medicare deductions.

Wrong yardstick: The raise is calculated using the CPI-W, an index based on urban wage earners rather than retirees, whose spending looks very different. Medical costs alone eat up nearly 30% of the average benefit, yet the formula gives them relatively little weight. That's why advocates want to switch to the CPI-E, which puts more emphasis on healthcare and housing costs. After all, a raise can only keep up with living costs if it's measuring the right ones.