Story updated to include Bank of New York Mellon

NEW YORK ( TheStreet) -- We aren't officially seeing inflation yet, but inflation is something sophisticated investors have been wagering on for several months .

In general, that is bad news for financial stocks because most of their assets are take an immediate hit, according to Dick Bove, analyst at Rochdale Securities.

"The average bank balance sheet is comprised of just 5% in hard assets--buildings, equipment, etcetera. The other 95% are typically in some financial instrument," Bove says.

Bove says bank earnings "exploded" in the inflationary 1970's, stocks tanked as investors demanded ever-lower price-to-earnings multiples before they were willing to invest.

One of the big reasons for the run-up in commodities prices and related exchange-traded funds like GLD ( GLD) and SLV ( SLV) is that investors see commodities as having a finite supply. Dollars, by contrast, are under no such constraints, as the Federal Reserve demonstrated recently by announcing its intention to print $600 billion to buy U.S. Treasury bonds in a long-anticipated second round of quantitative easing, better known as QE2

Economics 101 tells us that increasing the supply of something is an excellent way to make it lose value. More dollars in the financial system would seem to raise a real inflationary threat, even though it may be offset by a still-weak economy. That's a big reason why investors have been piling into gold and other commodities, as well as currencies expected to remain more stable than the U.S. dollar. Many currency strategists expect the dollar's weakness to continue over the next 12 months or more, even though it has shown strength of late amid renewed fears over the European debt crisis.

Common measures of inflation like the Federal Reserve Bank of Cleveland's median consumer price index (CPI) and the core CPI from the U.S. U.S. Department of Labor of roughly one percent suggest inflation is not a threat, but those measures could change very quickly, which is what commodities and currency investors are betting will happen.

Inflation of the kind seen in some third world countries, where prices on items in the grocery store go up literally every day, is not a legitimate threat, according to Mike Cosgrove, principal at Dallas-based analytics firm The Econoclast.

"But the idea of returning to inflation of, say, five or six percent is certainly feasible, and the politicians, Congress--they have a vested interest in higher inflation," Cosgrove says, pointing out that it would enable them to pay down the ballooning U.S. deficit more easily by using "cheaper dollars."

With its $600 billion bond buying program, the Fed has monetized nearly half the federal deficit, Cosgrove says. The U.S. Congressional Budget Office estimates the 2010 federal deficit at $1.3 trillion.

Five or six percent would likely hurt most financial stocks, though they thrived in the middle of the last decade while inflation was at three percent, above the Fed's two percent target. And even if you think another boom in financials is unlikely, the sector is sufficiently beaten up that it may not need a boom for it to outperform.

The safe way to play financials, then, might be to own some stocks likely to weather inflation better than others in the sector. Here are some ideas:

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