A sharp rise in inflation would be terrible news for the stock market and a catastophe for bondholders. But not everyone is afraid.

In fact, a select few mutual fund investors are positively cheering for it. They were heartened by Ben Bernanke's comments this week suggesting the rate remains "elevated," and by the inflationary news on unit labor costs.

They want more. Frankly, these perverse souls would love to see soaring prices and runaway interest rates. Memories of Jimmy Carter and double-digit inflation make them misty-eyed with nostalgia. They probably like to watch That '70s Show and listen to to old Bee Gees LPs.

Who are these characters?

Easy. Anyone who has a chunk of money in the ( RYJUX) Rydex Inverse Government Long Bond Fund (RYJUX) -- or one of its equivalents.

These fancy-footed mutual funds use derivatives to bet against the government bond market. Their value rises and falls with long-term interest rates. And long-term interest rates rise and fall with inflation expectations.

These have been good places to be for the past couple of weeks.

The Rydex fund, which used to be called Juno, is up 5.5% over the past month.

( RRPIX) ProFunds' Rising Rates Opportunity (RRPIX) is up a little more, at 6.2%. This younger and slightly smaller fund offers more kick. It still effectively tracks the yield on 30-year government bonds but promises 125% of the inverse performance, rather than just 100%.

To watch Brett Arends video take of this column, click here .

OK, they're modest gains. But at least they're positive. Long-term investors in these funds have suffered plenty while they have waited for the return of hyperinflation.

The Rydex Inverse Government Long Bond Fund has lost about two-thirds of its value since it was launched in 1994. During the same period, Wall Street, as measured by the S&P 500, has trebled.

It's a wonder the fund still has $300 million in net assets.

Investors in ProFunds' Rising Rates Opportunity have lost 28% of their money since it was launched just five years ago.

The question: Are investors in these funds wrong, or were they just way too early? Is inflation pretty much licked, or is it due to come back in a big way?

Long-term thinkers talk about great so-called "Krondatieff waves" of inflation, which take 60 years.

Thirty-year government bond rates topped 15% in the early 1980s -- three times the current level.

Last summer, I sat down with Cathy Minehan, the veteran chairman of the Boston Federal Reserve, for an interview. At the end, I asked her if there were anything she thought the markets ought to be paying more attention to.

Her answer: underlying inflationary pressures. She argued that they had been slowly but steadily building in the economy for several years. Wall Street, she said, was too interested in the short-term, monthly numbers.

A look through some of the government's price data bears her out. The five and a half years since January 2002 look very different from the five years before it.

The inflation rate for road haulage has trebled, from 5.5% in the period 1997-2002 to 18% since. For hospital costs it has doubled. Commodity prices, which actually fell over the earlier period, are up 28% since. Even lawyers' fees have accelerated.

Sure, the official inflation figure seems pretty benign, especially to those with long memories. Back in the early '80s, the official rate topped 14%. Today it's just 2.6%. We're safe, right?

Alas, we're not comparing apples and apples. Since the early '80s, Uncle Sam has quietly changed the way inflation is calculated -- several times.

No, this isn't conspiracy theory stuff. And as Minehan pointed out when I raised the issue with her, many of the changes have a lot of statistical justification. Real inflation in the past was probably overstated.

Nonetheless, the changes alter the final numbers dramatically.

Independent economist John Williams, who has been a consultant to blue-chip corporations for 30 years, believes he has worked it out. He estimates that using old-style calculations, the official inflation rate today would be a lot higher than 2.6%.

How much higher?

Try 10%.

All of which suggests that investors need to keep one eye on further bad news on the inflation front.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.

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