Don't wait to inflation-proof your portfolio
Prices don't look like they're going up anytime soon, but with the way the government is spending, it'll be time to pay the piper soon enough.
NEW YORK (Fortune) -- With the economy mired in deep recession, inflation isn't exactly a top-of-mind concern for most investors. After all, it's hard to see how prices are going to get pushed up when consumers aren't buying anything. Indeed, for many Wall Street economists, deflation seems to be the more immediate concern.
Even so, there is good reason to fear that inflation - along with the higher interest rates that accompany it - is a looming threat. Maybe not right now, but watch out when the economy improves and consumer spending picks back up.
Between the bailouts, the bank recapitalizations, the stimulus, and the latest Federal Reserve action plan - which involves buying up $1 trillion in Treasuries and mortgage bonds - the U.S. national debt has already ballooned past $11 trillion.
President Obama's proposed budget would force the government to sell another $3 to $4 trillion in bonds, and it's hard to envision how all that spending and borrowing won't eventually lead to a weaker dollar and a spike in inflation and interest rates.
"We are certainly doing things that could lead to a lot of inflation," Berkshire Hathaway (BRK.A) Chairman Warren Buffett said on CNBC earlier this month. "In economics there is no free lunch."
Commodities guru Jim Rogers has raised similar concerns, as have perma-bear investors such as Marc Faber and Peter Schiff. Schiff points out that prices of gold, oil and foreign currencies soared following the Fed's latest buying spree, indicating that "many market participants understand the inflationary implications of this policy."
No, we're not predicting for a return to 1970s-style, double-digit inflation. But neither are we ruling it out, which is why we think investors would be wise to add a little inflation protection to their portfolios.
Treasury Inflation Protected Securities. Better known as TIPS, these Treasury bonds are the easiest, safest, and most cost-effective way to hedge against inflation. The interest rate you earn rises with inflation, and best of all, for accounts of $100,000 or less, TIPS can be purchased without a transaction fee at TreasuryDirect.gov.
Rising Rates Opportunity 10 ProFund Think of this is a bear fund for bonds. The fund is designed to track the inverse price movement of the 10-year Treasury bond. So if inflation rises and investors start demanding a higher yield on their bonds (remember that the yield moves in opposite direction of the price with bonds), this fund will be a big winner.
SPDR Gold Trust Personally, I've always been a bit of a gold skeptic. (Why again is gold so valuable? Because it's pretty to look at?) But that's just me and the fact is that buying gold is a classic inflation hedge, and this exchange traded fund tracks the price of gold nicely.
Petrobras Inflation occurs when too many people want the same stuff. As soon as the economy recovers, the stuff everyone is going to want more of is oil. There's more than one good way to play oil of course.
You could do well snagging the industry leader, ExxonMobil (XOM, Fortune 500), just as you would hedging against commodity inflation with an oil ETF like SPDR Oil and Gas Exploration and Production (XOP).
Or you could go with Petrobras, the Brazilian oil giant. IT'S a riskier play, but the potential payoff is better because its enormous new oil fields give Petrobras the potential for significant production increases. 
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