Should inflation be worrying us now?

Stepping back from day-to-day work in Dubai during August and spending some time in Europe is always an interesting way to gain a new perspective on economic problems.

This summer I began to feel that a new specter is haunting the economic field, actually an old one making a comeback, namely inflation. It is not just that the introduction of the euro appears to have masked some price increases, or that accommodation has become ludicrously expensive in the UK (though it has). Or that inflation rates have ticked up in Europe despite negative economic growth.

Rather more it is that powerful inflationary forces have been unleashed around the world which will have an inevitable consequence.

One is the devaluation of the US dollar against the euro and to a lesser extent against the yen. A second is the biggest growth in US government spending in a generation, partly due to the invasion of Iraq but also down to the impact of the 2001 recession on tax revenues.

Then there is the inflation of energy prices this year due to the bungled US/UK occupation of Iraq. Finally low interest rates, designed to stimulate consumer spending, are inflating real estate prices and creating a dangerous bubble in this market.

Any one of these prime movers of economic activity would be worth highlighting. To be able to flag up four such indicators at the same time presents a pretty conclusive argument that inflation will continue to rise in the near term.

What does this mean for investors? First, get out of low-yield bonds and cash and reconsider equities, or at least those categories of share that will benefit from inflation, such as natural resources and energy.

Secondly, gold, other precious metals and commodities should be considered as likely beneficiaries of inflation. However, it is worth remembering that inflation is a fickle friend to investors and that the instability it causes is likely to prick investment bubbles, in real estate in particular.

Inflation is the friend of debtors - as it erodes the value of debts - and the enemy of those on a fixed income whose savings will fall in value in real terms. Buy property at a fixed price on a large mortgage, and if you are lucky its value will rise and the real value of its debt fall.

This is back to the mid to late 1970s. But beware there was a nasty property crash in 1974-5 in the West and the worst stock market crash since World War II. Indeed, many Arab owners of Central London property bought after that crash and still have these homes, now worth hugely more than they paid for them.

Inflation is like any other changing economic indicator. It offers opportunities to the market savvy and traps for those who do not pay attention. Make sure that you note the change in the way the wind is blowing and adjust your portfolio accordingly.