Although current U.S. economic data indicates that inflation is relatively subdued, there are numerous reasons to suggest that rising prices are on the horizon.
Rising commodity prices have already prevailed as demand for corn, wheat and soybeans around the world continues to outpace supply and political unrest has sent the price of WTI crude oil north of $109 per barrel. Furthermore, inflation has already prevailed in much of the developing world, causing the People’s Bank of China to increase its benchmark one-year lending rate to 6.31 percent and its one-year deposit rate to 3.25 percent. A similar tune was heard in India, when its central bank raised the cost of borrowing for the eighth time in nearly one year.
In the developed world, the European Central Bank just announced that it raised its benchmark interest rate to 1.25 percent to combat rising consumer prices. With the excessive spending measures, supported by increased lending and increased money supply, implemented by the federal government to prevent the U.S. economy from completely crumbling, it is just a matter of time before inflation looms and prices rise.
From an investor’s standpoint, some ways to play this likely inflationary environment include:
- SPDR Gold Shares (NYSEARCA:GLD); gold has always been a traditional hedge against inflation and will continue to be.
- iShares Silver Trust (NYSEARCA:SLV), which, similar to gold, is a good hedge against inflation. In addition to gold, silver has many industrial uses which will likely further support its increased demand.
- PowerShares DB Agriculture Fund (NYSEARCA:DBA), which holds futures contracts in food-based commodities such as corn, wheat, sugar, and soybeans, and is likely to continue to witness price appreciation as inflation looms.
- US Oil Fund (NYSEARCA:USO), which is a play on crude oil futures contracts. Historically speaking, crude oil appreciates in value during times of inflation, which would enable USO to reap the benefits
- iShares S&P North American Natural Resources (NYSEARCA:IGE), which is an equity play on the commodities markets. Some top holdings include Chevron Corp. (NYSE:CVX), Exxon Mobil (NYSE:XOM), Barrick Gold (NYSE:ABX) and Freeport-McMoRan Copper & Gold (NYSE:FCX).
- iShares Barclays TIPS Bond Fund (NYSEARCA:TIP), which is one of the most popular ways to hedge against inflation. TIP is designed to generate a yield that adjusts to the consumer price index, meaning that as the index rises, TIP’s yield rises, and vice-versa.
- IndexIQ CPI Inflation Hedged ETF (NYSEARCA:CPI), which aims to track an index that seeks to generate a rate of return that’s above inflation, which is measured by the consumer price index.
Disclosure: Long DBA, SLV