Inflation accelerated again in August, strengthening expectations that the Federal Reserve will raise interest rates at its policy meeting this week. Rising prices for goods and services, coupled with renewed tensions in the Middle East, have increased concerns among consumers that inflation could remain elevated in the near term.

Higher oil prices stemming from the conflict between the United States and Iran have been a key contributor to the inflationary pressure. Financial markets have also experienced heightened volatility over the past three months, weighing further on overall consumer sentiment.

In this uncertainty, investors may find it wise to focus on utility funds to help protect their portfolios. Notable options include American Century Utilities Inv (BULIX Quick QuoteBULIX - Free Report) , Fidelity Select Utilities (FSUTX Quick QuoteFSUTX - Free Report) and Franklin Utilities Fund (FKUTX Quick QuoteFKUTX - Free Report) .

Consumer Sentiment Deteriorates

The University of Michigan's Consumer Sentiment Index declined to 47.8 in September from 51.7 in August. The reading also came in below economists' expectation of 51.

Ongoing inflationary pressures have continued to undermine consumer sentiment. According to the survey, consumers' expectations for inflation over the next 12 months increased to 4.6% in September from 4% in August.

Expectations for inflation over the next five years also edged higher, reaching 3.4% in September from 3.3% in the previous month. The latest reading remains considerably above the 2024 range of 3.8% to 3.2%.

Notably, the short-term inflation expectation was at 3.4% in February, before the U.S.-Iran war began. Oil prices have generally moved higher over the past several months, although they eased somewhat in June and July.

That relief has since faded as tensions in the Middle East have intensified, sending energy costs higher again. Rising oil prices have affected a broad range of industries, pushing up the cost of goods and services and contributing to another acceleration in inflation.

The Consumer Price Index increased 0.4% month over month in August, according to the Bureau of Labor Statistics last week. On an annual basis, CPI rose 3.4%. Core CPI, which excludes the more volatile food and energy categories, advanced 0.3% from July, taking the annual increase to 2.4%.

The Federal Reserve kept interest rates unchanged earlier this year, but the latest inflation data could leave policymakers with little choice but to raise rates this week's meeting. Another increase in borrowing costs could prolong market volatility while putting additional financial pressure on consumers.

3 Best Choices

We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also carry a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

American Century Utilities Inv fund seeks current income and long-term capital growth. BULIX mainly invests 80% of its assets in stocks of companies engaged in the utilities industry. Within this 80% category, the managers will not buy shares of a company unless 50% or more of the company's revenues or net profits come from the ownership or operation of facilities used to provide electricity, natural gas, telecommunications services, cable television, water or sanitary services.

BULIX’s 3-year and 5-year annualized returns are 14.7% and 6.2%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than the category average.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of its assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.

FSUTX’s 3-year and 5-year annualized returns are 14.4% and 10.1%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.65%, which is lower than its category average.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Franklin Utilities Fund seeks capital appreciation and current income. FKUTX invests at least 80% of its net assets in securities of public utilities. Franklin Utilities Fund invests more than 25% of its total assets in companies operating in the utilities industry. The manager expects more than 50% of the fund's assets to be invested in electric utilities securities.

FKUTX’s 3-year and 5-year annualized returns are 15.4% and 9%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.71%, which is lower than its category average.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Want key mutual fund info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >