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With the central banks of the developed world continuing to use monetary easing to offset primary fiscal imbalances and investor concerns about sovereign defaults, real inflation and inflation expectations have taken hold.  Inflation rates are climbing and spilling over to the developing world, including China and India.

According to the US Bureau of Labor and Statistics (BLS), our core rate of inflation, as measured by the consumer-price index (CPI), is already at 4% and accelerating.  This is above our central bank’s (Federal Reserve) stated target of 2% inflation, considered healthy for a leveraged economic system.  That 2% target also happens to be low enough for the Fed to adjust through monetary policy changes.  Since the Fed has been trying to keep the country out of a deflationary cycle, we can say it has become a victim of its own success.

For most Americans, that headline rate of inflation is no surprise.  If anything, most people, including me, suspect that inflation pressures are still underreported by government metrics. With oil, food, and several other key commodities in high demand, actual inflation is likely higher.  How high inflation will climb before the Fed clamps down is anybody’s guess.  At the moment, the Fed is continuing to boost money supplies (M2 and M3) to pump credit into an anemic economic recovery.  This seems to be a losing battle as higher capital requirements and new lending regulations are keeping major banks from expanding their lending beyond the best qualified borrowers.

In this environment of elevated uncertainty and fear, many professional investors are betting on commodities as a defensive investment strategy.  Unfortunately for the average investor, those investments are already high flying and usually difficult to access.  By contrast, US real estate

to abate anytime soon.  This macro-environment helps to insure rents and investment returns will continue to climb for several years.  At the same time, limited supplies of housing are coming onto the market, while the population is still growing in already popular states.  So, once the current supply-demand imbalance works itself out in the next 2-3 years, appreciation should compound returns on top of rising rents.

As for where and how to buy, see part 2.