In the UK, as in other markets globally, there are worrying signs for ordinary investors the sleeping dragon of inflation is awakening.

Overall, the rise in inflation is part of a bleaker outlook, with a sharp slowdown in growth expected and inflation not expected to return to the Bank of England’s 2 per cent target until 2011.

The Bank of England sees the consumer price index getting close to 4 per cent this year, meaning it may not cut interest rates for at least two years.

For many, the effects of this are already being felt, with falling house prices, job losses in the financial sector and higher oil and commodity prices pushing up costs.

Globally, inflation is rising. With oil at US$130 a barrel and the industrialisation of China and India leading to structural changes in their economies, including a higher demand for meat, which requires more grain to be produced, this could hardly be otherwise.

For investors, particularly those in the UK and other countries where inflation has been at low levels for some time, action to mitigate the effects of inflation may be considered wise.

Traditionally, various investments have been used as a hedge against inflation, particularly real assets, as opposed to financial assets.

Real assets include things such as gold and commodities.

Both are seeing strong demand right now; commodities are in the midst of a bull market, on the back of the ‘Chindia’ or ‘Brics’ (Brazil, Russia, India and China) story, while gold is a safe haven for ultra cautious investors.

In the past, accessing these assets was difficult for the ordinary investor.

However, new instruments, such as exchange-traded funds or exchange-traded commodities, have made investing in commodities and precious metals easier and this year has seen huge inflows into these new instruments.

Inflation over the next couple of years may do more for the take-up of ETF products than any amount of marketing could ever achieve.

Property is another traditional bulwark against inflation. Unfortunately for UK property owners, the market appears to be cooling down and the mortgage issuers are under the cosh of the credit crunch.

Commercial property peaked a year ago and looks to be in a downturn, so global property investments might offer the best hope as an inflationary hedge.

Equities can also be used to try and beat inflation, but equity markets are not looking particularly rosy right now. If we are seeing a sea-change in global economic conditions, equities could remain in choppy water for some time to come.

One investment that may gain favour though is index-linked bonds. The supply of index-linked bonds has increased to around 12% of the world government bond market to meet rising investor demand.

For investors, index-linked bonds could be used to protect against inflation by holding home market index-linked bonds for domestic inflation and a global basket of index-linked bonds to protect against global inflation.

UK investors have traditionally preferred equities to bonds, but a period of above-average inflation may change this preference.

Bond managers should be beating the drum for inflation protection for investors with index-linked bonds and investors should be looking at the benefits of this approach.