Last Updated Jun 13, 2011 11:01 PM EDT

Assuming the economy has merely hit a soft patch and we’re not headed for a double-dip recession (as Fed Chief Ben Bernanke says and the market’s June swoon notwithstanding) then at some point some degree of inflation is a given. Some would say inflation is already here. The hard part for investors is figuring out how fast and by how much the purchasing power of their hard-won dollars is going to decline.

Bond King Bill Gross urges investors to stay away from U.S. Treasurys because, after inflation, they offer a negative return. Meanwhile, gold, that ultimate hedge against inflation, has soared to well above $1,500 an ounce.

But there are a host of asset classes offering protection against inflation that retail investors too often ignore, possibly at their own peril, given no one knows how far and how fast inflation may or may not rise.

Real estate, for example, is an investment that does well during times of inflation. With prices and mortgage rates at bargain levels, this may be a once in a generation buyer’s market, MoneyWatch’s survey of the real estate market shows.

However, as with so much in long-term investing, diversification and asset allocation are critical. When it comes to inflation, the right mix of investments is the key, write Dirk Faltin, head of thematic research, and Thomas Berner, U.S. economist, at UBS Wealth Management.

Although there are a spectrum of economic doomsday scenarios — ranging from a decade of Japanese-like deflation to 1920’s Germany hyperinflation — investors would be wise to position themselves somewhere in between. As Faltin and Berner write:

It would be easy to avoid the negative effects of future price inflation if we knew when it was going to start, how high it was going to be and how long it was going to last. We would simply have to invest in asset classes that offer the greatest and most reliable inflation protection. Unfortunately, this information is not available, they add rather dryly. More helpfully, Faltin and Berner recently assessed how different investments hold up as they run the gauntlet from deflation to hyperinflation. They also offered guidelines as to how investors with medium appetites for risk should position their portfolios.

If investors think gold, inflation-protected government bonds and commodities are the only defenses against inflation, they’re probably short-changing themselves, as this chart, courtesy of UBS Wealth Management shows:

The most important takeaway from this chart is that stocks tend to represent the biggest slice of the asset allocation pie most of the time. Only in cases of very low inflation/deflation or high inflation/hyperinflation do equities warrant a near shunning, UBS reckons.

Gold, on the other hand, should only account for a thick part of an investor’s portfolio in times of very high to hyperinflation. Maybe the gold bugs predictions will be borne out and we’ll all be buying loaves of bread with wheelbarrows full of dollars, but we’re hardly there yet.

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