WHEN the inflation figures came out last week showing that the government’s favoured measure of inflation, the consumer prices index (CPI), is now running at an annual rate of 1.9% it seemed to take an awful lot of people by surprise. I can’t think why.

Gordon Brown, the chancellor, may be fond of explaining how splendidly he has managed to keep inflation down over the past eight years, but you don’t have to be a particularly dedicated watcher of economic data to have noticed the oil price rising fast and to figure out that this rise would soon turn up in inflation numbers round the world, regardless of whether the chancellor wanted it to or not.

The fact is that it isn’t Brown or the Bank of England who has kept inflation low in Britain, whatever he might want the electorate to believe. Instead, stable prices have been a global phenomenon connected to the rise of low-cost manufacturing in Asia, and the long bear market in commodity prices.

But now the era of low global inflation appears to be coming to an end. Not only are all commodity prices rising but the prices of manufacturing goods in Asia are as low as they are ever going to go, so they aren’t going to have the same dampening effect on prices they have had for the past five years. And as global prices rise, Britain will suffer along with everyone else.

Or might we suffer more? I suspect we might. It isn’t just raw material costs that are rising for British companies; there are signs that wage inflation, quiescent so far, may take off.

Workers asking for more money look at two things. The first is the retail prices index (RPI), which used to be the government’s preferred measure of inflation (before it started rising rather inconveniently) and which the unions quite rightly consider their benchmark for negotiations.

I say quite rightly because the CPI is a pretty bad measure of the cost of living. It doesn’t include housing and only half of it is service-related. It makes much of the fact that you can buy a DVD player on Amazon for £19 but passes over the fact that you can’t get a babysitter in London for less than £10 an hour or a ladies’ haircut in a reasonable salon for less than £60.

The RPI, which takes more account of the actual cost of living, is rising at an annual rate of 3.2% and has been over 3% since last June, which means that unions are looking for wage increases well above the official inflation rate of 1.9%.

The second thing workers look at is the profits of the firms they work for — when they are high staff think pay rises should be high too. Two weeks ago the Communications Workers Union demanded that BT give its workers an 8% pay rise. Not because the workers deserve it (and that’s not to say they don’t), but because BT can afford it — the firm made profits of more than £1 billion for the last half year.

This is a classic example of late-cycle wage-push inflation (workers ask for higher wages, which pushes up costs, and eventually firms have to pass on those costs to customers). But sadly it isn’t the only example.

According to the Office for National Statistics, in the year to January 2005 wage growth was 4.4% across the board and 4.6% in the public sector — not far off three times the official rate of inflation. Once started, this kind of inflationary cycle is hard to stop. Who is going to accept a pay rise of 2% when they know people in the next office down are getting 5%? And who’s going to accept a 3% rise next year if they get 4% this year? If you still think inflation is low and set to stay low, it really is time to think again.

The question is what investors should do about it. The first thing, as ever, is to make sure you are getting the highest possible interest rate on your savings. Note that if we use the RPI as our gauge for inflation, higher-rate taxpayers getting 5% are no longer making a real return on savings (after adjusting for tax and inflation they receive only 3.2%) and even lower-rate taxpayers are making less than 1%.

Next, consider index-linked gilts. Their payout is linked to the RPI, and you can buy them cheaply at the post office. Otherwise it’s wise to make sure you are holding real assets that will rise in price as inflation rises.

My favourite candidates remain gold and silver — both thrive in inflationary times.

Merryn Somerset Webb is a former stockbroker and now editor of Money Week. Her views are personal and investors should always seek professional advice