Is the Inflation Beast Coming to the U.S.?

I think there is a high likelihood that inflation is coming to the U.S. in a bigger way over the rest of 2008. So far there is little evidence of serious inflation. Indeed for the first 3 mos. of 2008 the CPI ticked up at only a 3.1% annual rate. After a 4.1% increase in 2007 this doesn't appear to be too alarming. But, here is why I think inflation may tick higher. First, the Fed just injected a bunch of liquidity into the economy (by drastically cutting interest rates) and that tends to drive inflation. Second, with oil at $125 I think we should see that creep into the cost of many goods. Finally, with the dollar weakening and many of our goods coming from outside the U.S. I would expect many finished goods consumers buy to creep up in price. Goods from China in particular where the government is letting the Yuan strengthen should become significantly more expensive in dollar terms over the next few years.

There is not a lot you can do about inflation. You can hope that your wages will increase at the same rate as the goods you buy, but my guess is they won't. The only thing I can really suggest is that you save a little more than usual. Why? Because as things get more expensive you may need to tap into that savings to buy goods that are still quite affordable now. Furthermore, if inflation does rear its head then the Fed is likely to raise rates to put the breaks on it. If the economy is not healthy by then it may slow further as a result of higher interest rates. If that happens there may be higher unemployment and if you are one of the unfortunate ones to experience downsizing you will need that extra savings. Something I am thinking of doing (I still haven't pulled the trigger yet) is buying an inverse long bond fund that will hopefully benefit if inflation takes off. I have a hard time believing investors will accept 1% or lower real yields on long-term treasury bonds for too long . For those of you wondering
"real yield" means the yield after taking into account inflation -- for instance the "nominal" yield on the 10 year treasury note is 3.77% today, if inflation is 3.1% then the "real" yield is a paltry 0.67%. If inflation takes off, I think that bond yields will also likely rise (and the bonds themselves will fall) so the inverse long bond funds should perform quite well.