SAN DIEGO (ETFguide.com) - As the perpetual disagreement between
the two camps - inflation and deflation continues, hints of
inflation are popping up.
The Consumer Price Index (CPI-U) is the government's way of
measuring inflation and while it's a far from perfect gauge, it
gives us clues as to where inflationary pressures are growing the
most. Over the past year, prices for oil (NYSEArca: OIL), gasoline
(NYSEArca: UGA) and medical care are all sharply higher versus the
broader CPI index.
Inflation is clearly visible elsewhere. Prices for soft
commodities (NYSEArca: JJS) like cocoa, coffee, sugar, corn, wheat
and soybean have jumped 77 percent over the past 12-months.
Likewise, cotton prices (NYSEArca: BAL) have soared 171
Instead of trying to guess which specific commodities are headed
higher because of inflation, one way to capitalize is by owning a
diversified commodity fund that owns a basket of commodities.
Examples of this are the iShares S&P GSCI Commodity Index Trust
(NYSEArca: GSG) and the Greenhaven Continuous Commodity Index
is often criticized for overweighting energy commodities, whereas
equally weights all 17 commodity futures contracts within its
basket. The best choice is a matter of preference.
Other Inflation Hedges
While Treasury Inflation Protected Securities or TIPS (NYSEArca:
TIP) have traditionally been used to hedge against inflation, they
may not necessarily be a good method anymore. As with all fixed
income investments, they are not immune to higher interest rates
and longer dated TIPS in a rising rate environment will get hit
Another problem with using
as an end-all and be-all inflation hedge is their credit exposure
to the U.S. government, whose credit quality has deteriorated
substantially and will continue to do so for the foreseeable
future. If you absolutely must own TIPS, it's probably best to
stick with shorter-dated securities like the PIMCO 1-5 Year U.S.
TIPS Index Fund (NYSEArca: STPZ).
Should interest rates rise from here, this too will be another
inflationary trend. It will increase the cost of debt linked to
variable interest rates and make the cost of future borrowing more
Finally, broad arguments for or against inflation usually miss a
few hidden but important details. Higher inflation, for instance,
does not necessarily mean all asset classes will rise in unison. In
fact, some may not. Likewise, inflation does not necessarily spell
an end to deflationary forces in certain markets. ETFguide's
Profit Strategy Newsletter
identifies which assets will benefit from these trends and which to
avoid so you can capitalize.
For sure, procrastination or an apathetic approach will do
little to keep your portfolio from being ravaged from inflation. By
the time you scramble to protect yourself, it's already done most
of its damage. That's why an attentative proactive approach is
absolutely necessary. An ounce of prevention is worth more than a
pound of cure.