Theory on Inflation

The CPI numbers always underestimate inflation because of hedonic pricing, but they aren't a complete fraud.  The inflation numbers have been contained in the US because wages aren't rising.  Essentially, in a global world technological differences are narrowing quickly between developed and developing countries.  Thus, wage differences also need to narrow.

A big part of inflation numbers is housing costs, and rents are not rising as quickly because of the weak housing market.  It is easy to point to the cost of grains, or energy or softs and say we have rampant inflation, but that is only a small part of the average American's expenditure. 

 In any case, we probably won't be getting any big inflation numbers anytime soon, so the Fed will have an excuse to remain easy.  QE3 is very much possible.  Those betting on continued bond weakness due to inflation will be fighting the Fed who will institute another bond buying program if rates go too high.