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With millions of people out of work and the economy not acting the way anyone wants, the prospect of looming inflation is just about the last thing on anyone's mind right now. But already, you can find several signs of higher prices, and unfortunately for investors, many of the traditional hedges against inflation have already gotten bid up through the roof.

Theory vs. practice
Inflation isn't supposed to be a problem during periods of slow economic growth. The theory is that because consumers don't have much purchasing power during tough times, companies can't successfully pass through price hikes to their customers. Instead, companies rein in their profit margins in order to try to sustain demand. And if they don't, the resulting drop in demand puts downward pressure on prices anyway, again keeping inflation in check.

But reality doesn't match up with what that theory predicts. When the cost of coffee rose last year, Starbucks (Nasdaq: SBUX  ) and Kraft Foods (NYSE: KFT  ) successfully raised prices on their customers. McDonald's (NYSE: MCD  ) did the same thing with some of its menu offerings. US Airways (NYSE: LCC  ) started the 10th airfare hike of the year recently, passing on high fuel costs.

Add all that up, and you have a Consumer Price Index that's up almost 4% from last year's levels. And even with prices at the gasoline pump having come down lately, you can't count on the higher-price trend reversing soon.

How to handle it
A rising CPI does have a few incidental benefits. For instance, seniors are likely to receive their first boost in Social Security payments next year, as the jump in CPI reverses two years of frozen monthly benefits.

But the biggest problem with the inflation threat right now is that the traditional ways of fighting it are already extremely expensive. Even after gold's recent correction, the yellow metal has doubled since late 2008 and is up around 20% this year alone. And although some look for gold to keep rising from here, it's already too late to capture the best of the gains from the past 10 years.

The same holds for the inflation-adjusted Treasury market. Both individual TIPS and the iShares Barclays TIPS Bond ETF (NYSE: TIP  ) are at very high levels despite having declined somewhat from last month's highs. To get five years of inflation protection, investors have to be prepared to accept a negative real return of -0.57%.

The answer that's left
Among cheaper alternatives, the best inflation fighter left at your disposal is the stock market. In particular, two types of stocks are particularly well-positioned to deal with inflation.

One includes producers of raw commodities. Although raw-materials makers face higher costs of obtaining the things they produce, rising prices for their products can boost profits and open up new potential avenues for growth. For Teck Resources (NYSE: TCK  ) , for instance, some projects to mine zinc, coal, copper, or gold that aren't viable at lower prices become profitable when inflation strikes. Similarly, Mosaic (NYSE: MOS  ) sees higher demand for fertilizer when farmers see the benefit of inflation in the proceeds they receive from crop sales.

The other group includes companies that have to deal with significantly higher production costs but can pass nearly all of them on to their customers. Companies that have invested in building brand awareness can get a big payoff from their investment during inflationary periods, because brand power often equates to pricing power. Companies such as shoe giant Nike (NYSE: NKE  ) fall into this category of strong-brand stocks.

Get ready
Further rises in inflation may not be imminent, but you should still be ready for them when they do come. By taking steps now to protect your portfolio, you'll be well ahead of the crowd once the reality of higher prices starts hitting the mainstream economy.

If you're worried about inflation -- and you should be -- you should know about the companies that will soar because of it. Check out this free special report from The Motley Fool to find out about a tiny gold stock that's already digging up massive profits.

Fool contributor Dan Caplinger has noticed inflation most in ice cream prices. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, McDonald's, and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps getting better for you.

Read/Post Comments (18) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2011, at 2:11 PM, wallstr33t wrote:

    Looks like its time to purchase I-Bonds

  • Report this Comment On October 14, 2011, at 3:19 PM, jrj90620 wrote:

    Forget I bonds unless you really trust govt inflation figures.Actual inflation is much higher than govt reports.Retirees on Social Security are falling way behind in purchasing power.Of course,with our govt being broke,you can't expect that people living off govt are going to prosper.Best is to buy commodities and commodity sellers of items with good future demand by countries that are growing,like Asia and South America.

  • Report this Comment On October 14, 2011, at 4:11 PM, MyPortfolioGuide wrote:

    The last time this inflation "story" was running was late last year. I wrote an article on it in my blog to calm clients who were reading "news" and hearing guys like Glenn Beck stoke fears of hyperinflation.

    How did all that turn out since it's been about a full year since those stories were ingrained in everyone's dome?

    Yes...inflation will eventually creep back into the picture. If anything it could help the markets but don't let the media convince you that an ear of corn will cost $30 in a few months.

  • Report this Comment On October 15, 2011, at 1:30 PM, Bsorge10 wrote:

    We have had commodity inflation for over over year far in excess of the official CPI. The problem is that our government is broke and is having to borrow lots of money. They will keep interest rates down to next to nothing even when prices are soaring. Therefore I believe this article may be meaningless under this premise. As a retiree I hate this policy.

  • Report this Comment On October 15, 2011, at 1:40 PM, AAAMPblog wrote:

    For investing it is the inflation TREND that is more important that the rate of inflation. We are in a time period where we must be ready for deflation, inflation or both (biflation). I have written articles that can give investors places to research given their outlook for the inflation trend for anyone interested at:

  • Report this Comment On October 15, 2011, at 1:45 PM, AAAMPblog wrote:
  • Report this Comment On October 15, 2011, at 2:18 PM, wrenchbender57 wrote:

    We have had inflation higher than the government admits for some time. All you have to do is visit the grocery store or the gas pump to verify this. Apples for $1.00 to $2.00 per pound, or more when they used to sell for 50 cents a pound or less, and so on.

    Gasoline prices are self evident. It amazes me that the government figures are so much lower than the reality most of us face every day.

  • Report this Comment On October 15, 2011, at 2:25 PM, jfrankh57 wrote:

    CPI is a farce...the government changes the parameters to meet its goals. The largest proponent of the current inflation measurement is housing which has had a slump in the last 3-4 years, while consumer staples have seen hike after hike! Personally, my housing costs have remaind stable over the past 14 years when I bought (prudently) within my means and those costs didn't nose dive when the market tanked unlike the housing costs have not gone down with the market, yet my costs for everything else have gone up.

  • Report this Comment On October 15, 2011, at 2:30 PM, dixiedee wrote:

    Interesting that no one seems to be able to address the affect of inflation will have on real estate. The only way it seems to have any affect is when jobs become plentiful. Meanwhile, while jobs go begging, real estate sits on the sideline while prices and costs of everything else rises. The Fool failed to address inflation's affect on real estate. Right?

  • Report this Comment On October 15, 2011, at 4:07 PM, interd0g wrote:

    I have been buying the commodity story since 2006. I played it with one of Jim Rogers ETNs. Despite Roger's assurances it has been a lousy play in the period. No doubt articles such as this will come true some day, but without a time scale the info isn't worth much.

    Same with the 'peak oil' story now into it's tenth year and still playing to full houses.

  • Report this Comment On October 15, 2011, at 5:31 PM, xetn wrote:

    " A rising CPI does have a few incidental benefits. For instance, seniors are likely to receive their first boost in Social Security payments next year, as the jump in CPI reverses two years of frozen monthly benefits."

    With the government manipulation of the CPI, seniors have not received a cola for at least 2 years. Perhaps this year will be different, but seniors should not hold their collective breath. The one thing that might actually get them a cola this year is so Obama can claim he was responsible and garner some senior votes.

    It is funny, at least to me, that the media, including TMF, have been scoffing at the idea of inflation, while any one purchasing the necessities of life for the last few years have been all too aware of it.

  • Report this Comment On October 15, 2011, at 7:07 PM, wrenchbender57 wrote:

    @ xetn: Yeah, I guess personal inflation must be different than political inflation!

  • Report this Comment On October 15, 2011, at 9:00 PM, NolAloha wrote:

    Normally people look at inflation as either "Cost Push" or "Demand Pull".

    Cost Push arises from increases in the price of the components that make up the product. That is really not happening right now. Raw materials, whether oil, aluminum, human input (labor) or computer resource capacity are all constant or dropping in price. There is a lot of "Slack" in the world economy. Cost push will not be happening in the near future.

    Demand pull is not there either. There are no shortages of anything that I would buy, from homes, to cars, to food, to transportation.

    So where is this inflation going to come from.?

    Folks, I see DEFLATION, not inflation in our futures, for the next two or three years. Looking for the S&P 500 to revisit the 700 lows of the recent past, as this "Secular Bear Market" (which started in March, 2000) continues to drive security values into the ground.

    I'm sticking with high dividend stocks with relatively low debt risks. I like some of the mREITs (NLY), shipping companies like NAT, Canadian resource companies like PVX, PWE, and PGH,and business development companies, like ACAS that have been really beaten down.

    Banks WILL come back,but new regulations will make their life difficult, and I want to get paid for waiting.

  • Report this Comment On October 16, 2011, at 10:54 PM, RAWinners wrote:

    Inflation statistics: These are so easy for industry to beat that government statistic are meaningless.

    Take food, one major consumer cost.

    Tuna in a can: cut down on 'chunks', add more water.

    Frozen dinners: cut down on ingredients and add more water. Then come out with a 'chunky' variety at a higher price.

    Ice cream: cut down on the container size. 1 gallon becomes 4/5th of a gallon. Check it out

    Anything that comes in a can: reduce the can size by 1/2 oz brings money directly to the bottom line.

    The list is endless.

    From candy to automobiles, industry knows how to address the problem of inflation without 'inflating'.

  • Report this Comment On October 16, 2011, at 11:38 PM, HarryCaraysGhost wrote:

    Alternative title-


    Football season and all :)

  • Report this Comment On October 17, 2011, at 10:49 AM, GoOtto4Nic8 wrote:

    MT and FCX are sporting attractive prices, whether your premise of higher commodities prices comes true or not. Well-run, deep-pocketed high yield companies never go out of style.

  • Report this Comment On October 17, 2011, at 2:21 PM, AvianFlu wrote:

    The approximate 24 month lag time between "money printing" and the onset of inflation wreaks havoc on an impatient investor's mindset. Please note that M2 money supply has been increasing at an accelerating rate. For example, I believe it was today's Wall Street Journal that pointed out M2 expansion rate in August was over 24% annualized! Check back in 2 years and see what happened.

  • Report this Comment On October 21, 2011, at 11:26 AM, Regarded49 wrote:

    We are back in the 50s/60s, when "govt" inflation numbers were low, housing was cheap, and interest rates were awful. Somehow we had to pay for the war debts and the only way out then, which at the time seemed easier, was to inflate our way out.....not with numbers, but with the printing of huge amounts of money!

    ...we are doing the same thing now.

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