Published: October 29, 2010

If Paul Revere were around, maybe he'd get on his horse and start yelling, "Inflation is coming! Inflation is coming!"

I think it is coming. In fact, in many ways, it's already here, just not yet widely recognized. The deflationists still hold sway in the bond market, where investors happily accept puny yields...

But there are ways that you can profit from this impending doom. Let's discuss the types of companies that are safe from this certain fate...

The deflationists argue that the dollar will buy more tomorrow than it does today. It is inflation's opposite. When most people talk about inflation and deflation, this is what they mean. This definition would pain the old economists who were more careful in their use of language.

Be that as it may, deflation today is an argument facing death by a thousand cuts. Every day, evidence rolls showing that the dollar is buying less. Today's Wall Street Journal points to the whale in the aquarium. One headline reads, "From Cereal to Helicopters, Commodity Costs Exert Pressure."

The article goes on to point out what is painfully obvious to anyone who follows commodities and companies. The cost of nearly everything is going up.

General Mills will boost the price of a quarter of its cereals to reflect rising prices for grains. Kraft is raising prices. Domino's Pizza hasn't said it will yet, but it did say the price of cheese is up 29% from a year ago. Profit margins are suffering in the meantime.

There is a long list of companies battling rising costs of the commodities. As the Journal notes:

"Corn is up 44%, milk is up 6.5%, hot rolled coil steel is up 4%, copper is up 29% and oil is up 14% from a year ago... Across Corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb."

Still, the Journal's article had no discernible effect on the optimistic bondholders. (Or I should I write "bag holders"? For soon, they will be left holding the bag.) The bond market seemed bored and yields inched up just a touch today, such that the 10-year note pays a whopping 2.5%.

By the time the bond market says inflation is here, it will be too late - too late for bondholders.

In the meantime, the prices of gold and silver are up too. All of these things point to the obvious: The dollar is buying less.

Why? Let us the count the ways. There is the U.S. government bleeding red ink and heavily in debt. Both portend bad things ahead. How will they square the circle? The easiest - and the most politically expedient - way is to print more money.

There is the jawboning going between central banks of the world all trying to cheapen their currencies. The rationale is to stimulate exports, but don't be fooled. The real effect of a cheapened currency is that your dollar will buy less.

There are kinds of fancy names for what the Fed is doing - "quantitative easing" comes to mind. But at bottom, they all mean the Fed will create more money.

More dollar printing simply dilutes the buying power of all dollars. And so we see today the beginnings of a fully fledged inflation. It can and will get much worse.

Don't pay attention to that thing called the Consumer Price Index, or CPI. It is running at about 2%. It is an engineered figure and not to be trusted.

Nonetheless, on the basis of this suspect fluff, the Fed tells us inflation is under control. In fact, it is complaining that the inflation rate may be too low. Bernanke would have us believe the Fed can calibrate inflation within tolerances of 100 basis points. But it way overestimates its powers. Once the inflation train gets going, it will be very hard to slow down. One day, the Fed will wish inflation were only 2%.

In the meantime, what to do?

I think we do what we have always done. We try our best to invest intelligently. That includes investing in commodity companies that benefit from a higher inflation rate. Their selling prices will rise faster than their costs.

The price of commodities adjusts quickly to the falling dollar. Wages always lag that. Plus, there are fixed costs that adjust more slowly - such as leases, for example. So there will be a window for commodity companies to make some serious hay.

I'll be watching this space closely for more specific examples in the near-term...

[Ed. Note: If you're concerned about the ravages of inflation on your portfolio, a safe alternative is in TIPS ETFs. These inflation-protected Treasuries offer investors the safety of government-backed funds, but are adjusted to make up for inflation. A couple of interesting funds include the PIMCO 1-5 Year US TIPS Index Fund (NYSE: STPZ) and the iShares Barclays TIPS Bond Fund (NYSE: TIP).]

-- Chris Mayer
Editor
Whiskey and Gunpowder

Sponsored Link: Free access to this Secret $200 Retirement Blueprint. Last year $200 could have turned into $10.1 million following 5 simple steps revealed in this secretive retirement blueprint. It's happened before, but could it happen again and to you? Click here to watch the presentation now.

Note: This article originally appeared on Penny Sleuth