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By Mike Caggeso

Associate Editor

Like a vanquished enemy, inflation has been out of sight and out of mind. But old enemies can resurrect themselves.

And that’s just what’s going to happen with inflation, two fixed-income experts say.

In a report posted on the Web site of Pacific Investment Management Co. (PIMCO) which runs the world’s biggest bond fund Chris Caltagirone and Bob Greer said inflation will return as soon as 2010 and will remain a factor for some time to come after that — a scenario that makes commodities and TIPS (Treasury Inflation-Protected Securities) two [investment choices] that can provide investors diversification as well as exposure to sectors that may benefit from future economic developments.

In the near term, however, Caltagirone and Greer expect excess capacity and high unemployment among the key catalysts of supply and demand to extend deflation for several more months or quarters.

However, they believe that the policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years, Caltagirone and Greer wrote. Although we expect growth to contract in 2009, [the] government stimulus [outlays] may reflate the economy as soon as 2010 and beyond that.

Caltagirone and Greer join a growing chorus of prominent inflation hawks that includes Warren Buffett, Marc Faber and Jim Rogers.

On Monday, Buffett said in a CNBC interview that inflation levels could reach as high as those in the 1970s as a result of the government’s attempts to resuscitate the economy.

That same day, Faber publisher of the Gloom, Boom and Doom Report agreed.

The massive money printing we have and the massive deficits we have now will make it difficult when there are some price pressures for the Federal Reserve to actually increase interest rates, Faber said in a Bloomberg Television interview.

Likewise this week, Rogers a longtime commodities bull said that conventional U.S. Treasuries that aren’t inflation-protected are going to take a beating from U.S. policies.

Inflation’s Catalyst: Uncle Sam’s Wallet

President Obama’s 2010 budget plan is already forecasting a $1.8 trillion deficit for the current budget year

In addition to the $789 billion stimulus bill passed in mid-February, U.S. Treasury Secretary Timothy F. Geithner has said he is ready to commit up to $1 trillion to strengthen the nation’s banks and jumpstart lending.

The basic logic which Money Morning’s Martin Hutchinson outlined as far back as November is that with the government pumping so much money into the economy, it’s bound to have an inflationary impact.

The high inflation Buffett referred to peaked in March 1980, when the consumer price index (CPI) gained 14.8% from the year before.

And though it seemed excruciating, the highest the CPI moved last year was 5.6% in July. followed closely by a 5.3% increase in August, according to the Bureau of Labor statistics.

Recently, consumer prices fell 0.8% in December and increased 0.3% in January. February inflation statistics are due for release next Wednesday (March 18).

How Protect and Profit from Rampant Inflation

In their PIMCO report, Caltagirone and Greer recommend investors consider TIPS.

The decline in TIPS prices makes them attractive now on both an absolute basis and relative to nominal Treasuries, they wrote. In addition, although we expect inflation to remain low in the near term, we believe that inflation will rise in the medium term, which means TIPS may be a more strategic, as well as tactical, investment opportunity.

Starting as soon as next year, they expect government stimulus measures to kick in and reflate the economy.

And with commodities projected to rise in step with inflation, Caltagirone and Greer recommend investing in PIMCO’s (naturally) CommodityRealReturn strategy, which gains exposure to commodities through derivatives that track the Dow Jones AIG Commodity Total Return Index, and the derivatives are collateralized with an actively managed TIPS portfolio.

Money Morning’s Investment Director Keith Fitz-Gerald wrote a how-to guide for TIPS investing. in which he suggested a pair of TIPS funds, one by PIMCO, to help investors hedge.

Another way to hedge is with gold.

Investors panicked when the yellow metal dived along with the economy. But Money Morning’s Hutchinson an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets understood perfectly what other investors did not.

Gold is not a safe haven against recession, Hutchinson said. It’s a safe haven against inflation .

But with commodities and inflation on the rise, gold could reach as high as $1,500 an ounce by the end of the year, Hutchinson said.

Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong, Hutchinson said. I think gold has quite good hidden-store value.

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