According to the Bureau of Labor Statistics, inflation is low and still declining. The reported 12-month change in the Consumer Price Index is a mere 1.1%. Some economists are worried that the faltering economy will double-dip and that we will see actual deflation.
On the other hand, there is anecdotal evidence that price increases are sneakily happening throughout the economy. Looking at commodity price charts, it is difficult to come to the conclusion that inflation is not occurring. As I scanned through some commodity charts recently, here are a few that have made new 2010 high in August or September: feeder cattle, lean hogs, live cattle, pork bellies, gold, silver, cotton, milk, coffee, orange juice, sugar, soybean oil, corn, wheat, oats, soybeans, soybean meal, Australian dollar, British pound, Swedish krona, Japanese yen, and Swiss franc. The big missing piece is the energy complex, where most of the items peaked in May. Since energy is, by far, the biggest weight in most of the commodity indexes, most indexes have pretty tame behavior.
On the other hand, the Greenhaven Continuous Commodity Index is more equal-weighted. Here’s what it looks like over the last six months, compared to both the S&P 500 and the Barclays Aggregate Bond Index.
Click to enlarge. source for both Yahoo! Finance
No one knows how this will play out in the future, of course. I can guess that CPI might begin to climb pretty rapidly if energy demand ever picks up though. Will it end up spooking the bond market? I don’t know-bonds have performed decently this year so far. I think the message is maybe just to make sure that your investment policy has a way to cope with inflation if it appears, whether it is through potential exposure to inflation-sensitive equities or actual alternative assets. Don’t assume inflation is not a threat just because the economy is barely keeping its head above water right now.
Posted by JP Lee 
