Don't forget inflation

According to the FT's Alphaville blog today-

What is remarkable about the past 20 years is not the performance of stocks, but the way inflation was contained.

Now, Barclays says, this is coming to an end. Taking a four-year rolling average, inflation on both sides of the Atlantic has risen by more than 1 per cent during the current expansion - the first time this has happened since inflation was tamed in the early 1980s.

This is attributable to the growth of the developing world. With China and other countries demanding more, and the supply of resources limited, the logical consequence is inflation.

With inflation back as a real risk, policymakers no longer have the easy solution they have used for the past 20 years - cutting interest rates at the first sign of trouble. That implies the current credit crisis is not another turn in the cycle, but the end of an anomalous period when inflation was under control. It also implies the level of inflation in China is crucial.