As the US government has resorted to excessive spending measures to keep the economy from completely crumbling, many investors suggest that inflation is inevitable and could even prevail in the coming months. 

Current economic data suggest that inflation is running lower than expected; however there are numerous reasons to think that inflation will eventually be inevitable.  Some of these reasons include the Federal Reserve’s implementation of QE2, which launched in early November, the increases in money supply in the earlier stages of the Great Recession to ignite a spark in the US economy and rising commodity prices are likely to take their toll on the consumer price index (CPI).  In fact, rising prices have already started to emerge, evident through the recent rise in energy prices (i.e. crude oil and gasoline), food prices (i.e. wheat, sugar, coffee and soybeans) and airline tickets. 

At the end of the day, although inflation is not prevailing, signs are starting to emerge.  Some ways to protect against inflation include:

  • iShares Barclays TIPS Bond Fund (TIP), which is one of the most popular way to hedge against inflation.  TIP is designed to generate a yield which adjusts to the CPI, meaning that as CPI rises, TIP’s yield rises and vice versa.
  • IndexIQ CPI Inflation Hedged ETF (CPI), which aims to track an Index that seeks to generate a rate of return that is above inflation which is measured by the consumer price index.
  • PowerShares DB Agriculture Fund (DBA) holds futures contracts in food based commodities such as corn, wheat, sugar and soybeans, which could witness price appreciation as inflation looms.
  • US Oil Fund (USO) which is a play on crude oil futures contracts.  Historically speaking, crude oil appreciates in value during times of inflation, which would enable USO to reap the benefits.
  • IndexIQ ARB Global Resources ETF (GRES) which holds global companies that operate in commodity-specific market segments and whose equity securities trade in developed markets.  As of 1/5/2011, GRES’ top holdings included Hormel Foods Corp. (HRL), Tyson Foods Inc. (TSN), Barrick Gold Corp. (ABX) and Kraft Foods Inc. (KFT).

Disclosure: No Positions

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