Gas Prices Jumped 9.1% in 1 Month, and CPI Inflation Hit 3.7%. Here’s What It Means for Consumer Stocks.

Inflation data continues to move month to month with no rhyme or reason.

After a soft inflation report in August, the September Consumer Price Index (CPI) reading came in hot again this morning, Oct. 14. The CPI rose 0.6% seasonally adjusted in September and was 3.7% higher year over year.

The monthly increase was in line with economists' expectations, while the headline number came in 0.1% higher than expected. Gasoline prices rocketed over 9% higher in the month, accounting for roughly half the headline CPI's gain.

Stripping out more volatile food and energy prices, core CPI rose 0.3% in September and 2.6% year over year, each 0.1% higher than economists expected.

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How it impacts consumer stocks

Generally speaking, higher inflation and gas prices hurt consumer stocks from an operational perspective.

Transporting consumer goods from suppliers to stores becomes more expensive due to higher gasoline prices, a cost that can be passed on to consumers.

Consumers also feel the pinch as they pay more for gas and most other items, squeezing their budgets and reducing their purchasing power.

While a 0.6% monthly increase is a big jump, it was largely expected due to higher oil prices in September amid escalating tensions between the U.S. and Iran. But the surprise came in core inflation, which removes energy and food prices.

"CPI came in hot and it wasn't just fuel prices, as core inflation ran at a 3.7% annualized pace in September and 3.2% over three years," the Carson Group's Chief Macro Strategist Sonu Varghese said, according to CNBC. "The only surprise is that investors keep getting surprised by broad-based inflation. And we've yet to see the full impact of higher diesel prices and the AI boom."

US Core Consumer Price Index MoM data by YCharts

Despite operational struggles and potential margin pressure, consumer staple stocks can actually outperform when inflation is rising. That's because economic pressure can lead investors to worry about a potential recession.

People are unlikely to cut many consumer staples, such as food and toiletries, from their budgets unless they simply can’t afford them, since these are necessities.

The State Street Consumer Staples Select Sector SPDR ETF (NYSEMKT:XLP) had risen nearly 1.2%, as of 11:56 a.m. ET and is nearly 9.7% higher year-to-date, as some investors have rotated into these safer stocks.

Consumer stocks may face more pressure if interest rates continue to rise

Following the CPI report, the odds of a rate hike at the Federal Reserve's October meeting rose from roughly 22% yesterday to nearly 44% today, according to the CME Group's FedWatch tool, which tracks federal funds futures.

If the Fed still views inflation as too high and not making progress toward its 2% target, it is likely to raise interest rates at least one more time this year, if not more.

While the goal of rate hikes is to slow the economy, they will pressure consumers in the near term by raising borrowing costs, which can also lower purchasing power.

This may not be good for consumer stocks because safer assets, such as U.S. Treasury bonds, become more attractive when rates rise. Even consumer stocks with strong dividend yields don't look so appealing with bond yields in the 5% to 6% range.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.