In late 2008 and early 2009, governments around the world made unprecedented injections of liquidity into the global financial system in an effort to pull economies out of a tailspin and avoid a repeat of the Great Depression. For the most part, these stimulus measures have had the desired effect; global equity markets have headed gradually higher and there are now signs that job creation is beginning to pick up once again.

But the implementation of these stimulus plans also planted a new cautionary seed in the minds of investors, as many began to worry that the surge in the money supply would be followed in short order by a major uptick in inflation. Well known hedge funds began betting that inflation would head not toward the high end of the Federal Reserve's "comfort zone," but into the double digits and perhaps as high as 20%. The wave of inflation anxiety was reflected by growth in certain pockets of the ETF industry. In 2009, the iShares Barclays TIPS Bond Fund (NYSE: TIP), a fund that invests in Treasury Inflation Protected Securities, saw $8.9 billion in cash inflows. Only the SPDR Gold Trust (NYSE: GLD), which holds another popular inflation hedge in gold bullion, took in more cash. A list of the ten ETFs that financial advisors researched the most in 2009 contained a number of products linked to asset classes that perform well in inflationary environments: iShares COMEX Gold Trust ((NYSE: IAU), No. 9), PowerShares DB Commodity Fund ((NYSE: DBA), No. 7), GLD (No. 2), and TIP (No. 1).

Hopefully those advisors who aggressively sought to protect client portfolios from the ravages of inflation haven't been holding their breath. Data releases in recent months have shown that U.S. inflation has been virtually non-existent, a trend that some now expect to continue through at least the end of this year. U.S. import prices posted the largest decline in almost a year in May, sliding 0.6% according to data from the Labor Department. A report released Wednesday morning showed that wholesale prices fell for the second straight month in May, driven lower by drops in energy and food prices. The Producer Price Index (PPI), which measures inflation before it reaches the consumer, dropped 0.3% last month, roughly in line with economist expectations. A report showing the inflation pressures felt by consumers is due out Thursday, and is also expected to indicate that upward price pressure is non-existent,

Holding Their Ground
The tame inflation data over the last several months has been great news for equity markets; for the time being, Bernanke and the Fed aren't feeling any pressure to hike interest rates, a scenario that could hinder borrowing and cut off growth. Conversely, tame inflation data has held in check ETFs comprised of TIPS, securities that see their principal adjust in line with CPI readings.

TIP was recently up about 3% on the year, more a reflection of a flight to safe haven investments than rising inflation fears (TIPS are after all fixed income securities that tend to perform well in tumultuous environments).

Despite the lack of concrete evidence of a surge in inflation, TIPS ETFs have remained very popular; investors believe that they haven't dodged the inflation bullet altogether, but rather delayed the pinch of rising prices. Through the first five months of the year, TIP had taken in about $1.3 billion in cash inflows, making it one of the most popular ETF destinations once again. The six ETFs in the Inflation Protected Bonds ETFdb Category finished May with aggregate assets of more than $22 billion, an increase of more than 60% from a year earlier.

TIP and other inflation-protected bond ETFs are, of course, only one option for protecting assets against the ravages of inflation. Some investors prefer gold as an inflation hedge, while others opt for agricultural commodities (see Beyond TIP: 10 ETFs To Protect Against Inflation).

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This article was originally published on by Michael Johnston; disclosure: No positions at time of writing.

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