In the past weeks, I've digested as much inflation paranoia as I can stomach. Far from double-digit debasement of the dollar, current data suggests a coming period of relatively moderate inflation, highlighted only by pockets of significant price increases. Nervous investors who reshuffle their portfolios to brace for an impact that may not come could pay the price for their panic.

Breaking down the inflation equation
In the broadest sense, inflation results from too much money chasing too few goods. On its own, an increase in the money supply -- which has most definitely occurred -- won't cause a widespread spike in prices. True inflation also requires the "chasing goods" factor: vibrant economic activity, fed by robust employment and a healthy lending environment. Needless to say, I don't think we'll be seeing that anytime soon.

Of course, you don’t have to believe me on any of this. Nobel-prize-winning economist Paul Krugman recently explained why runaway inflation looks more like fearmongering and politicking than sound analysis. Addressing concerns about the expanded money supply, Krugman wrote:

[The Fed] has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices. But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them … So the Fed isn’t really printing money after all.

OK, fine, but surely the recent Fed actions must be inflationary at some point -- right? Not necessarily, Krugman argued:

The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

Finally, there is the nagging question of whether the U.S., unable to sell enough Treasuries, will ultimately be forced to meet its debt obligations by printing money, devaluing the dollar in the process. This outcome seems plausible when one considers forecasts that U.S. debt will soon exceed 100% of GDP.

Here, Krugman points out that Belgium, Canada, and Japan have all faced similar fiscal binds in recent decades, but none of these governments resorted to debt monetization.

Admittedly, the above statistics do not inspire giddy optimism. But history also indicates that there is little cause for panic. Investors currently moving their portfolios into inflation-proof bomb shelters could be disappointed when the shrapnel doesn’t start to fly.

Inflation or not, oil's a buy
Of course, the past doesn't always dictate the future, and investor perception can damage your portfolio's value just as much as the actual facts. So it does make sense to take moderate steps to guard against inflation-related market movements.

You could seek shelter in gold, through the popular SPDR Gold Shares (NYSE:GLD) ETF, but this is mostly a bet on market sentiment. Instead, consider an investment that offers inflation protection and benefits from utilitarian fundamentals: oil.

According to the International Energy Agency, recent project delays and cutbacks in the oil industry will cost us 2 million barrels per day in future production, and roughly 4.2 million barrels per day of future capacity has been pushed back 18 months or more. These constraints strengthen oil's fundamentals, even before you consider the additional ballast provided by an economic recovery.

For the time being, the price of crude seems to have gotten ahead of itself, but investors can use a pullback to pick up shares of the integrated majors such as BP (NYSE:BP), Conoco Phillips (NYSE:COP), Total SA (NYSE:TOT), and ExxonMobil (NYSE: XOM). All but Exxon offer dividend yields of roughly 4% or better. For investors with greater risk tolerance, consider oil-sands players Canadian Natural Resources (NYSE:CNQ) and Suncor (NYSE:SU), whose large North America asset bases offer safety from the greedy hands of dictatorial governments.

Converting your dollars into shares of oil-related companies won't necessarily protect you from market volatility, but it should provide profits over the long term, whether your portfolio must overcome massive inflation, or muddle through a period that is both less dramatic and far more plausible. 

Other Foolish views on inflation:

Total SA is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak does not hold shares in any company mentioned. The Fool's value is justifiably inflated by its hydrocarbon-based disclosure policy.