Is the World Headed for Stagflation?

Is the World Headed for Stagflation? - at www.moneyweek.com - the best of the international financial media

It's time to dust off my stagflation call, which has been out of the money for much of this year. For some time now, I have worried that the Goldilocks era of strong growth and low inflation in the global economy would give way to a period of slower growth and higher inflation. Almost a year has passed but my worries have not materialised: Goldilocks has prevailed with the economy growing beyond expectations and global inflation decelerating somewhat after accelerating going into 2005.

However, recent economic data, combined with the rise in energy prices this summer and the likely policy reactions in Washington to Hurricane Katrina, have firmed my belief that the global macro environment will turn stagflationary soon. If so, currently flat yields curves should steepen, currently tight risk spreads should widen, inflation-protected assets should appreciate, and volatility should rise.

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