Inflation everywhere … including my break room!

Inflation finally hit home a few days ago. There I was, counting out change for the soda machine in my company's break room. Three quarters — 75 cents — is what a Diet Coke has cost for who knows how long.

But when I pressed the button, what appeared in the electronic display? “$1.00.” In other words, the cost of a can of soda just jumped 25 percent. Sigh.

Import Prices, Producer
Prices Climbing Fast!

It's not like my can of soda is the only example, either. I'm paying more for groceries, gas, and all kinds of other things — and I'm sure you are too!

Indeed, the cost of imported goods overall surged 1.5 percent in January. That was almost double the 0.8 percent rise economists were expecting, and a more-than-5 percent jump from a year earlier. Even if you take out food and fuel, you see that “core” imports jumped 0.6 percent in price.

Or how about producer prices?

Wholesale costs shot up 0.8 percent between December and January after rising 0.9 percent a month earlier. They're up 3.6 percent from a year earlier. Again, even if you buy the asinine argument that we should strip out food and gas, you get a 0.5 percent rise in “core” producer prices.

That's the biggest rise in any month since October 2008. Further up the food chain, if you'll pardon the pun, intermediate goods prices surged 6 percent from a year earlier. Crude goods jumped an even-greater 10 percent. Every company from PepsiCo and McDonald's to Illinois Tool Works and Whirlpool is raising prices to compensate for surging input costs.

So it should be no surprise that consumer prices are on the move too! They surged 0.4 percent in January after rising by an equivalent amount in December. Even the “core” figures rose 0.2 percent, the biggest rise in 15 months.

Does a trend get any clearer than this? I sure don't think so!

Heck, the United Nations and World Bank are warning of food riots in several emerging markets. We've also seen Middle Eastern governments in Tunisia and Egypt topple, in part because of high costs that average citizens can't stomach.

Bernanke Clinging to His
Inflation Fantasy, But …

Despite soaring prices in the stores and at the gas pump, Bernanke doesn't see inflation as a problem.

Of course, ivory tower economists like Fed Chairman Ben Bernanke continue to cling to their inflation fantasies. When he testified before Congress several days ago, Bernanke said “overall inflation is still quite low and longer-term inflation expectations have remained stable.”

He added that commodity prices surges don't concern him one bit. That's the same message coming from other Fed “doves,” as I outlined last week.

But again, the markets aren't buying what the Fed is selling.

Remember how I said the yield curve might flatten as expectations for future Fed rate hikes increase? That's precisely what has been happening for a few days now, and I expect that trend to continue. We'll probably see ALL interest rates rise, but short-term rates rise more on a relative basis.

For investors, that means you should stay “short” long-term Treasuries — or at least avoid owning them! You could also consider an inverse bond ETF that targets intermediate-term Treasuries, like the ProShares UltraShort 7-10 Year Treasury (PST). It's designed to rise 2 percent in value for every 1 percent decline in the price of Treasuries with remaining maturities ranging seven to ten years.

[Editor's note: For specific guidance on how to protect every dollar you have during these treacherous times, click here to learn about Mike's Safe Money Report.]

Bottom line? “Fighting the Fed” by selling bonds rather than buying them during the QE2 program has been extremely profitable. I don't expect that to change anytime soon — because Bernanke's beliefs don't jibe with what you and I are seeing and experiencing every single day!

Until next time,

Mike