There are plenty of good reasons to believe inflation is coming.

U.S. government debt has surpassed $9 trillion, nearly tripling from $3.4 trillion in 2000.
And things are getting worse.

The government ran a deficit of $1.42 trillion in 2009 alone. Even as the economy has recovered, the current administration estimates the deficit for 2010 will be $1.5 trillion. [See Nathan Slaughter’s “Shocking Facts About the U.S. Debt Problem…”]

How is the government going to pay all that debt? One way is inflation. The Federal Reserve has every incentive to boost inflation because it would in effect reduce the debt, as it would be paid with devalued dollars.

Meanwhile, the government is injecting money into the system by basically giving it away. The current discount rate (the rate charged to commercial banks to borrow money from the Fed) is a microscopic 0.75%. To add perspective, the discount rate was 5.25% in 2006 and 19% in 1980.

A massive flood of dollars into the financial system typically leads to inflation. Since the flood of dollars has been so large, it could lead to a large amount of inflation, possibly in the double-digits. But there’s no sign of inflation yet. In fact, the consumer price index (CPI) increased a mere 0.3% in August. The current 1.2% annualized CPI rate is the lowest in decades.

The Fed recently expressed concern that the risk of deflation was greater than the risk of inflation at this point and said it was prepared to take action to increase inflation to a level to support economic recovery. If the Fed actually wants more inflation, it will probably get it.

The long term dynamics are already in place. Now, the Fed has announced it will likely flood the financial system with still more money and hasten its arrival.

Investments to own for inflation
A great way to hedge against inflation is by investing in hard assets that tend to maintain value in times of inflation. Commodities such as minerals, grains, metals, sugar, cotton, livestock and oil typically rise in price along with inflation. In fact, when the consumer price index (CPI) increased from 3% in May of 1972 to 11% in December of 1974, the S&P Goldman Sachs Commodity Index rose +222%, averaging +55% annually.

Three investments should not only thrive in times of inflation, but also have solid growth prospects even without it.

BHP Billiton, Ltd (NYSE: BHP) is the world’s largest publically traded mining company. The Australia-based conglomerate sells a variety of natural resources (including aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium and silver) for industrial production throughout the world.

Not only should the price of natural resources increase with inflation, but worldwide demand should also continue to increase. The emergence of China and other emerging markets has exponentially and permanently increased industrial production across the globe.

#-ad_banner-#Rising industrial production during the past several years had led to an average earnings increase of more than +100% per year for the past five years. BHP’s stock returned an amazing average annual return of more than +24% a year in the past 10 years, while the S&P 500 has been negative during the same period.

The company sells industrial raw materials all over the world, but its primary markets are the fastest growing — China and the rest of Asia. BHP also pays a dividend, which currently translates to a 2.3% yield and has grown at an average annual rate of +25% per year since 2002.

ExxonMobil (NYSE: XOM) is the world’s largest public oil and gas company. The energy giant does business with most of the world’s countries and explores for oil and gas on six continents. In 2009, the company produced 2.4 million barrels of oil and 9.3 billion cubic feet of natural gas a day and currently has about 15 billion barrels of oil equivalent (BOE) in reserves, 62% of which is crude oil. The company is also the world’s largest refiner.

The oil story is similar to the overall natural resource story, in that growth in worldwide demand and consumption should lead to higher prices. Prior to the financial crisis and worldwide recession, oil prices had benefited mightily from growing global demand. Oil prices rose from about $10 per barrel in 1998 to $147 in 2008. The price has retreated to about $73 per barrel, but the same dynamics that drove oil to $147 still exist. But, there’s another major factor that should buoy oil prices going forward — scarcity.

The planet has an estimated 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, and far less if the uptrend in the world’s appetite continues. The combination of rocketing demand and dwindling supply should lead to significantly higher oil prices in the future, even without inflation. ExxonMobil also pays a quarterly dividend that has doubled in the past decade and currently yields 2.8%.

Monsanto (NYSE: MON) is a St. Louis-based agricultural products maker and the world’s leading producer of seeds for corn, soybean, cotton, fruits, vegetables and other crops. The company genetically engineers seeds that produce more bountiful crops and produces herbicides that protect crops against bugs and weeds. The firm’s seed segment generated about two thirds of the company’s profits in 2009, while the herbicide segment contributed the rest.

Helping the world to produce more and better food is obviously a practical business plan. A rising world population will demand more food, and emerging market populations with increasing wealth are demanding higher quality foods. While profit and revenue ($11.7 billion in 2009) continued to rise throughout the financial crisis and recession, the company has been struggling of late.

Monsanto is facing increased competition for its flagship herbicide — Round-up. The struggles with this product have led the company to warn that 2010 profits (fiscal year ended 8/31) will be at the low end of guidance. The stock has lost -40% so far this year.

But despite recent struggles, the company continues to offer cutting edge products in a defensive and growing industry and invests about 10% of sales in R&D. Monsanto still has excellent longer term prospects and the stock is cheap, selling at a P/E ratio about -31% below the five-year average.

Action to Take –> Metals, oil and food are all commodities that should hold up well in times of inflation. While there are many other ways to invest in these commodities, these companies are some of the biggest and the best. Their size and diversity makes them less likely to encounter company-specific problems and peculiarities that negate the overall trend in their businesses.

In addition to providing a strong hedge against inflation, BHP, ExxonMobil and Monsanto should prosper from strong trends even if inflation is somehow avoided. While inflation hasn’t emerged yet, by the time it does, the prices of these stocks will likely be much higher. They all sell at reasonable valuations and are good buys at current levels.

P.S. Nathan Slaughter, the editor of StreetAuthority Market Advisor, is recommending some inflation-crushing investments for his $100,000 real money portfolio. Discover which investments ideas are best-positioned to SOAR in the coming inflation boom.