I saw a guy in a dark alley yesterday, wearing a trench coat. He said: “Hey buddy, wanna buy some lumber?”

Okay, that’s a joke. But here’s what isn’t a joke: the Consumer Price Index (CPI) for April. The government released inflation data on Wednesday and it alarmed Wall Street. The quickening economic recovery is boosting demand for a variety of products and raw materials, while at the same time, pandemic-induced supply disruptions are causing shortages. Notably, in just one year, the price of lumber has increased 377%.

Now’s a prudent time to examine inflation protection measures. To be clear, I don’t think we’ll see hyper-inflation on a sustained basis. Not everyone agrees with me (especially the doomsters on cable television). However, from my viewpoint, there’s still plenty of slack in the economy as a countervailing force.

Read This Story: Reader Forum: Is Inflation a Major Threat?

Let’s not forget, the U.S. economy last year suffered its worst quarterly decline since the Great Depression. In addition, the base number for the latest CPI report was particularly low because the coronavirus pandemic last year crushed the economy and prices.

For several economic indicators and not just inflation, COVID is distorting year-over-year comparisons. Moreover, the Federal Reserve has been expecting a bump in inflation and estimates it will be temporary.

That said, inflation is a growing threat and you shouldn’t be complacent. If you haven’t already, you need to implement an inflation protection strategy. Below, I’ll show you how.

Inflation ignites…

U.S. inflation, as measured by the CPI, jumped to 4.2% on an annual basis in April from 2.6% in March, data published by the U.S. Bureau of Labor Statistics revealed Wednesday. That’s the fastest jump since September 2008.

This April reading came in higher than the market expectation of 3.6%. On a monthly basis, the CPI edged higher to 0.8% from 0.6%. The Fed’s economists don’t expect inflation to maintain this torrid pace over the long haul, but there’s no denying that April’s numbers were a shocker (see chart).

The “core” CPI (excluding volatile food and energy prices) in April leaped 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.3%. Nearly all major component indices increased in April. Commodity prices have surged, especially for raw materials such as lumber and copper.

The Fed is sticking to its forecast that inflation will eventually settle into the range of 2% and the central bank has vowed to refrain from raising interest rates (for now). Nonetheless, investors got spooked by the latest CPI data.

On Wednesday, the fallout was swift and severe. The Dow Jones Industrial Average shed 681.50 points (-1.99%), the S&P 500 fell 89.06 points (-2.14%), and the tech-heavy NASDAQ plunged 357.75 points (-2.67%). Bond yields rose significantly. The yield on the benchmark 10-year Treasury note climbed to 1.69% from 1.62% a day earlier. In pre-market futures trading Thursday, stocks were extending their losses.

Your inflation survival guide…

The most critical principle to consider when creating an inflation protection strategy is your risk tolerance, which is usually defined by how close you are to retirement.

The rule of thumb is, the closer you are to retirement, the more inflation protection you should have. There is no “correct” formula for all investors. The key factors driving the appropriate amount and type of inflation protection are your risk tolerance and overall vulnerability to unfavorable inflation surprises.

Those close to retirement should pursue a diversified approach, adopting various types of inflation hedges, and at the protection levels consistent with their risk profiles and liabilities.

A proven inflation protection tool are U.S. Treasury inflation-protected securities (or TIPS). TIPS are tied to the CPI; when the CPI goes up, the principal values of TIPS rise, too.

Investors are increasingly scooping up TIPS, recent data compiled by Bloomberg show. Fueling the buying frenzy are worries that inflation protection could become prohibitively expensive as the price of these instruments are bid higher.

In addition to low-cost TIPS, I recommended that your inflation protection strategy includes a diversified mix of commodity and real estate stocks, as well as emerging markets exposure. By increasing your stake in developing economies, you’re protecting your assets from the risk of a U.S.-centric versus global inflation shock.

Gold’s growing luster…

Roughly speaking, the following portfolio allocations make sense under current market conditions: 45% cash, 30% stocks, 15% hedges, and 10% bonds. Make sure your hedges sleeve contains hard assets.

Read This Story: The Rush Is On For Hard Assets

About 5%-10% of your hedges sleeve should contain gold, the traditional inflation hedge. The value of gold tends to increase as the purchasing power of the dollar declines. The price of gold has soared this year and the “yellow metal” is on track to continue its ascent into the foreseeable future.

My preferred way to profit from increases in gold prices is through small-cap miners that can put corporate operating leverage to work.

Our investment team has just pinpointed a junior gold mining stock that’s poised for exponential gains. If you act now, this tiny $9 company could hand you 20 times your money. It’s an unbeatable combination: outsized growth plus inflation protection. For details on this under-the-radar gold stock, click here.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.