Some of the world’s highest-profile economists and investors are warning that inflation may be on its way back and could hit double figures in the next five years.

Harvard professor Niall Ferguson has spoken of a “clash of the titans” between the competing forces of inflation and deflation — or Godzilla versus King Kong — and, on balance, thinks inflation is the bigger risk due to the “double danger of printing money and excessive \ deficits”.

Now the hedge fund advised by best-selling author Nassim Nicholas Taleb is launching a fund that seeks to profit from the return of hyper-inflation.

Taleb’s 2007 book The Black Swan warned of the impact of highly improbable events on world markets. US hedge fund Universa, with which he is associated, is now launching the Black Swan Protection Protocol-Inflation fund.

It will invest in commodities such as oil, copper and corn and will also “short” government bonds — a bet that makes money when prices fall — in case inflation takes off as it did in the 1970s.

Mark Harris of Henderson Global Investors believes inflation could return by 2011 and hit more than 10% in five years. Meanwhile, Tom Dobell, manager of the £2.9 billion M&G Recovery fund, expects “inflation — probably hyperinflation” in the next few years.

The markets seem to agree: commodities, which generally perform well in inflationary times, have registered their biggest monthly rally since July 1974, with oil at nearly $70 a barrel, up from $45 in April, and gold nearing $1,000 an ounce. However, some think deflation remains the larger threat and the commodities rebound is a bear market rally.

The retail prices index (RPI), fell to –1.2% in April and is expected to hit –2.7% in the coming year. We look at who’s likely to be victorious in Ferguson’s “clash” and how investors should position their portfolios.

INFLATION

Analysts fear inflation could stage a return as central banks pump billions into the financial system to pull the global economy out of recession.

The Bank of England is already injecting £25 billion a month into the UK economy by purchasing gilts (government bonds).

With interest rates also at a record low of 0.5%, the fear is the authorities could overstimulate borrowing and, in turn, spending, which would ultimately push up prices.