Fed inflation projections

According to Bloomberg:

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

My translation: don't listen to government statisticians and economists. Expect massive inflation down the road, not deflation. The technical reason: economists are retrospective, relying too much on lagging indicators, instead of forward-looking data. The "real" reason: it's in the government's best interests to under report inflation data. Pension fund and social security payments with cost-of-living adjustments are linked to the consumer price index (CPI) data. Also, a soaring cpi is unnerving to markets and consumers, driving up interest rates, especially at the long end of the curve (longer expiration bonds). This caps economic growth as the cost of borrowing increases.

As consumers, we know the real story when components of our budget are rising on a regular basis. So what should we do in the face of diminished purchasing power? Precious metals and other commodities, including energy and grains are good hedges against inflation. Aside from the physical commodities, mining companies and commodity exchange traded funds (ETF) are other potential plays. For bond investors, there are Treasury Inflation Protection securities (TIPS), and the TIP ETF.

Disclaimer: Due your own due diligence and consult with your financial advisor. These are not specific recommendations.