No, he's not clad in black PJs and sneaking into bank vaults. If only. Ben Bernanke is engaged in a process that's far more insidious and far more damaging to your financial well-being: He's eroding the buying power of your hard-earned, long-saved dollars with easy money policies.

Hungry yet?
The evidence is everywhere, even in the "core" CPI, which pretends that food prices don't matter. Those of us who do eat shelled out 5.6% more in July than we did last year. And that blended statistic doesn't get to the whole story. Get a load of what inflation has done to the following staples.


July '07

July '08

1-Year Increase

Diesel Fuel

 $ 2.93

 $ 4.79


Flour (1 lb.)

 $ 0.35

 $ 0.54



 $ 0.55

 $ 0.80


Eggs (dozen)

 $ 1.50

 $ 2.01


Gasoline (gallon)

 $ 3.01

 $ 4.14


Gas (piped, 100 therms)

 $ 127.92

 $ 169.91


Bread (1 lb. loaf)

 $ 1.21

 $ 1.38


Milk (gallon)

 $ 3.74

 $ 3.96


Source: U.S. Bureau of Labor Statistics. Liquids by the gallon; other food commodities per pound.

This inflation looks likely to continue, because the producer price index showed costs -- jumping 1.2% from June to July alone -- hitting 9.8% annually, and inflation to producers eventually makes its way to consumers. If manufacturers don't have the guts to raise the prices outright, they engage in the sneakier practice of shrinking serving sizes. A recent USA Today story highlighted dwindling portions. That means fewer Fritos from PepsiCo, meagerer Hellman's mayo from Best Foods, and even fewer paper towels per package from Procter & Gamble.

You're bailing out the economy whether you like it or not.
Why is this happening? Supply and demand play a part, but a lot of the inflationary trouble is the direct result of the Fed's economic "medicine." Cheap money or "liquidity," in Wall Street speak, is doing what it always does: pushing up prices. Cheap money chasing returns is what caused the housing bubble. More cheap money now means an even more panicked chase for returns, and with real interest rates negative in the U.S. and much of the world, the hot money is heading to commodities and pushing up prices everywhere. By favoring meager growth at any price, Bernanke and his comrades have made the conscious choice to sacrifice the savings of Millions of Americans. Better to make your dollars worthless over time, quietly, 5% a year, than to shock everyone with a recession -- even though we could probably use one.

Unfortunately, for a wide swath of frugal, responsible Americans, the current result is little better than a recession. When your dollars buy a lot less stuff, you have a lower standard of living. And the more you saved over the past few years, the worse off you are.

What's the cure?
Short of plying Ben Bernanke with cut-rate gin the day before the Fed meeting, there's only one thing you can do to combat this inflation, and that's to earn a better return on your savings. Luckily for us, the stock market provides a great vehicle for doing just that. Over the long run, stocks have produced 10% to 11% compounded returns. Of course, returns over short periods can be brutal, but that's exactly where our opportunity lies.

Come again?

The greatest investors of our time, guys like Warren Buffett and Shelby Davis, made their biggest scores during panics and stock market slumps. When the entire market gets paranoid, it puts every business on sale, and throws out plenty of great companies in the process, valuing them below their long-term value. Buying on the panic is where you make your money -- you reap the gains later, when everyone is euphoric again. I can tell you (because I checked the charts) that there were plenty of people selling small caps during the market's gloom in mid-2002. But folks who had the courage to pick up strong small caps as varied as Quanta Services (NYSE:PWR), General Cable (NYSE:BGC), and Grupo Aeroportuario Del Sureste (NYSE:ASR) saw enormous wins.

Company Name

Price Change, 2000-2008

Quanta Services


General Cable


Cummins (NYSE:CMI)


Kirby Corporation (NYSE:KEX)


Grupo Aeroportuario Del Sureste


Landstar System (NASDAQ:LSTR)




Data and screening from Capital IQ.

It doesn't happen right away, and it takes a solid temperament, but it does happen, and those are the kinds of returns I spend a lot of time hunting.

As co-advisor on our premium small-cap service, Motley Fool Hidden Gems, I have the agony and excitement of watching many of our favorite companies get brutalized by the market. If you think wider market gyrations are dizzying, try buying a few shares of our favorites.

These stocks tend to move more than most because they're smaller, and they seem riskier than the safe-haven stocks or commodities plays that  have become extremely popular. To us, these market fits provide a perfect recipe for amazing future returns. We consciously look for small market leaders with balance sheets strong enough to weather the upcoming storms. We look for owner-inspired corporate cultures and companies with strong moats. In short, we look for the strongest small caps we can find, and we rejoice when the market puts them on sale, because that means opportunities for you and us.

We don't sweat the economy, but we do look for economic trends that we believe the market doesn't fully appreciate. In fact, my colleague Bill Mann and I recently tapped a pair of companies that are leaders in their fields, are serving high-growth and high demand industries, and whose stocks are still underappreciated by a market obsessed with timing the next commodities trend.

If you'd like to see the latest additions, a free trial to the service is available, on us. We think the Hidden Gems philosophy and active online community can help you learn to love economic and market turmoil (if not $5 gas). You risk nothing to find out.

This article was first published July 1, 2008. It has been updated.

Seth Jayson is co-advisor at Motley Fool Hidden Gems. At the time of publication, he had shares of Grupo Aeroportuario del Sureste, but no positions in any other company mentioned here. Fool rules are here.