If inflation returns, interest rates and commodity prices will rise. Equities and bonds will do poorly. In the ten years from 1971 through 1980, for instance, large stocks provided an annualized return of 8.4 percent while intermediate term government bonds returned 5.7 percent, according to Ibbotson Associates. But inflation raged at 8.1 percent.

So where do we invest?

As with fixed income investments, the alternatives here range from fairly conventional to well off the beaten track.

Real Estate, The Domestic Inflation Hedge. The first stop is to add a segment of REIT investing to your portfolio. According to several studies, the addition of investment real estate to your portfolio will increase overall return while reducing volatility. In the current environment, real estate earns more current income than most other investments while providing a significant inflation hedge.

How can real estate inflate any more than it already has?

Simple. Just as people bid up real estate when interest rates are falling, investors are willing to pay more for real estate when its replacement value is rising. The easiest way to invest is to select either a large mutual fund that specializes in REITS or a very large REIT.

The largest mutual fund that invests in REITS is Fidelity Real Estate (Ticker: FRESX), a $2 billion fund with a 4 star Morningstar rating and a recent 12-month yield of 3.67 percent. You can raise the yield to 4.98 percent and still have a 4 star rating if you move to the third largest fund, Cohen and Steers Real Shares (ticker: CSRSX) but you'll have to make a minimum investment of $10,000.

Another approach is to go direct to the REITS themselves. Equity Residential (ticker: EQR) is the second largest REIT and the largest of the group that specializes in apartments, with a market capitalization over $7 billion and property all over the United States. It also has a dividend yield of 6.5 percent.

Why a REIT that specializes in apartments instead of offices, shopping centers, or some other type of property?   Because home ownership has reached record levels, interest rates are very low, and financing is easy. Move to an inflationary environment and home ownership will less competitive with apartment complexes.

Energy, The International Inflation Hedge.   "Black gold", like regular gold, is another currency that governments hate. Nations that have oil reserves can be rich--- provided their leaders don't scarf up all the money--- and nations that don't have reserves have to scramble to pay their energy bills. With declining production from aging mega-fields and new discoveries both smaller and more expensive to develop, the stage seems set for a long period of strong energy prices. In addition, the messier things get in the Middle East, the more likely someone will try to price oil in Euros, not dollars.

The largest of the energy mutual funds is a no-load, low expense fund with 5 stars from Morningstar. It's Vanguard Energy (ticker:VGENX) and it's done slightly better than the S&P 500 Index over the last 1, 3, 5, 10, and 15 year periods. Over the last 15 years, which were marked by weak or declining energy prices, it ranked 286 of the 1,279 domestic equity funds that survived the period.

An alternative would be to buy a global   "basket" of very large oil companies with large reserves of oil and gas. Companies in the basket could include Exxon-Mobil (ticker: XON), BP PLC (ticker:BP), Royal Dutch (ticker:RD), and Petrochina (ticker: PTR).

What can we do beyond energy? Well, we can go back to the last inflation and check out the first fund created to deal with an inflationary period with broad expectations of rising prices and possible material shortages. That fund is T. Rowe Price New Era (ticker: PRNEX), founded in January 1969. It hasn't managed to beat the S&P 500 Index but if you were looking for single fund that would give you a commitment to energy, industrial materials, and gold, this would be it.