With the government’s reputation for competence at record lows following the Northern Rock debacle, last week’s damning report into the regulation of Equitable Life and now the Treasury’s attempts to rewrite the fiscal rules, Gordon Brown is probably the last person you’d want to lend money to.

It would have been one of the best, and indeed the safest, ways to make money over the past year, though. While UK equity funds have dived 9.8% over 12 months and equity-income funds, usually a safe haven, have fared even worse with a 13.7% decline, the normally less-than-exciting index-linked gilt sector has returned an average of 12%.

There’s a reason why you don’t hear much about index-linked gilts: returns are steady but rarely shoot the lights out. With inflation soaring, however, they are enjoying their time in the sun.

Four out of the top ten funds in June were in the sector, with the best, the Scottish Widows UK Index Linked tracker, up a stellar 3.22% in just one month.

When you invest in an index-linked gilt, as with a standard gilt, you are in effect lending money to the government. It pays you a fixed amount of interest in return and unless the government goes bust you get your money back at the end of a term.

The beauty of index-linked gilts is that the value of your capital and your interest goes up in line with inflation.

That’s a big bonus with the soaring cost of food and fuel sending prices ever higher. Inflation jumped to 3.8% in June, up from 3.3% the previous month and an 11-month high. And that was just on the government’s preferred consumer prices index.

If you look at the more representative retail prices index, which includes housing costs and on which index-linked gilts are based, the cost of living is 4.6% higher than a year ago, up from 4.3% in May.

It’s no coincidence, then, that Fidelity, one of Britain’s biggest fund managers, chose last week to tell me about its new Global Inflation-Linked Bond fund. The scheme will invest in a portfolio of index-linked government bonds from America, Japan and Europe as well as the UK.

Barclays Capital, the investment banking arm of the high-street bank, has also got in on the act by extending its range of inflation-linked exchange-traded funds — investments that follow an index but can be traded like shares. Even sleepy National Savings & Investments (NS&I) has realised it has a winner on its hands with its index-linked savings certificates, which it is promoting with a big advertising campaign.

The three- and five-year certificates pay the retail prices index plus a fixed return of 1% a year — or 5.6% following last week’s spike in RPI. Returns are tax-free, so that’s the equivalent of 9.33% if you’re a higher-rate taxpayer and 7% if you are in the basic-rate band.

If inflation spikes to 5% by the end of the year, as many City analysts think possible, NS&I will be paying 6% — or 10% gross for a higher-rate taxpayer. You’re not getting returns like that anywhere else — especially not when you consider that NS&I is pretty much the safest investment going.

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