There is a real bun-fight going on at the moment over the dangers posed by inflation. While it is almost impossible to find two fund managers, economists or commentators with the same opinion of what the future may hold with regard to this measure, there are two broad camps establishing themselves.

One camp is of the opinion that future inflation is going to be high, estimates range from “a bit above average” at the sensible end of the scale, right up to Weimar Republic-style hyperinflation at the easily excitable end – usually occupied by tabloid journalists.

However, high-profile names such as FE Alpha Manager Steve Russell believe CPI could hit the high single digits within the next decade.

The second camp, one I’m firmly ensconced in, thinks that the threat of inflation is at best over exaggerated and at worst completely imagined and that deflation is the real enemy.

While I intend to summarise the economics, the truth is that it’s nigh-on impossible to know how things are likely to turn out, and not that difficult to weatherproof a portfolio against either scenario.

The case for high inflation goes something along these lines: paper money, not backed by any physical store of value, effectively only derives its worth from the goods and services you are able to exchange it for.

By printing lots of it, as we have effectively done through quantitative easing (QE), without a corresponding increase in the number of things you are able to spend it on, its value decreases.

Thus if twice as much money can only be used to buy the same amount of stuff, then it must be worth half as much.

It is debateable how much money has to be printed before there is any noticeable drop in value; especially since the extra currency gets recycled many times through the banking system, where its impact could be multiplied massively.

The worst-case scenario is that there has already been too much extra cash printed and the effects are slowly gathering momentum.

Additionally, there is the fear that by becoming the lender of last resort to governments, notably in the US and UK and more recently the ECB, central banks will be unable to take corrective action without effectively bankrupting their home nations.

High inflation erodes the real value of your portfolio, and this needs to be protected against. One obvious starting point is inflation-linked bonds.

The income on these bonds is indexed to the rate of inflation. The M&G Index Linked Bond fund could be considered for inclusion. While this will prevent a fall in the real value of income received, it could still leave you exposed to falling real capital values.

A fairly consistent defence against moderately high inflation has been equities. It makes sense to match up markets to currencies; if you are concerned about UK inflation then UK equities are a good choice.

They protect both income levels and capital value. Shareholders will always demand a real return, forcing businesses to pay out higher dividend rates to attract investors.

At the same time, the higher rates will attract investors seeking income protection who would otherwise be in low-yield assets such as bonds, thus raising demand and pushing up capital value as well.

If you are a bit more extreme in outlook, with a sizeable number of people predicting the end of the fiat money system altogether, then it is best to hold physical assets.

Gold is the favourite of inflation conspiracy theorists and its record price shows the extent of the fear of high inflation.

As a homogenous, globally traded commodity, its value tends to increase any time the threat of inflation rises anywhere in the world.

Gold’s recent performance is partly attributed to the rising inflation levels in Iran increasing its demand.

The short- to medium-term outlook for gold prices makes this a reasonable choice, although I have personal reservations about its long-term suitability.

The difficulty with investing in gold is that unless you physically have it in your hand, you are just as exposed to the system of interconnected promissory notes as you are with equities or any other paper asset.

Rather than constructing your very own Brink’s-MAT, an ETF linked directly to physical gold such as BMG Gold Bullion could be a good choice.

Alternatively the more traditional method of gaining gold exposure is through an equity fund focusing on gold mining companies; here Investec Global Gold or the racier small cap focused MFM Junior Gold could be considered.

Raw materials such as oil, food and other industrial metals and minerals are likewise relatively good bets in a high-inflation environment.

These physical assets can not be debased by simply conjuring more up and as they will always be in demand, their value is reasonably assured.

Again, it is quite hard to stockpile barrels of crude oil or frozen orange juice concentrate, but if you are looking for security you want as little separation from the physical items as possible; again an ETF such as Amundi ETF Commodities S&P GSCI Agriculture or Amundi ETF Commodities S&P GSCI Metals works well.

A focused fund can also be a useful addition to a portfolio, such as Barings' five crown-rated Global Agriculture or Guinness AM’s Global Energy.

I consider commodities investments to be best used as long-term positions, as the high levels of speculative activity in these markets make short-term behaviour erratic and very difficult to anticipate.

Other, slightly more exotic, physical stores of value to consider are things such as fine art or wine. While there are very few investment funds available, it is relatively easy to make modest direct investment through a suitable broker or dealer.

It is important to remember that inflation is a risk that is actively managed by most fund managers as part of their standard investment process.

A well-diversified portfolio, not just across asset classes but taking in a good spread of strategies and outlooks will likely cover you from the most likely inflation scenarios.

In next week’s blog, Gleeson will look at methods of protecting your portfolio against disinflation and deflation.