Oil prices have moved lower, after rising to another peak at the beginning of the month. This is helpful in maintaining global growth, which was beginning to face greater downside risks due to high energy costs.

However, the market remains volatile because of speculative interest and rapidly changing sentiment. So, further short-lived spikes aren't out of the question.

The evidence from the available data is that there are no serious supply shortages, and inventories are rising. At the same time, officials from some OPEC members have issued statements in favour of higher production.

It may not be necessary to raise output, but it is an indication that they are concerned about the economic health of consuming countries.

What they would like to avoid is a sharp slowdown in global growth, which would significantly reduce revenue streams for oil-producing countries. This would play havoc with the finances of those who are most dependent on oil income to fund their expenditures. So, essentially, it is in everyone's interest to have global growth chugging along smoothly, along with oil prices that do not undergo boom and bust cycles.

Recently, Greenspan also got into the act of talking energy prices down. As for inflation, the language from Fed notables is that they will continue to exercise vigilance. And, that should be enough to cap any upside to inflation. Cost pressures and labour market conditions aren't such that a self-generating inflationary spiral is in the works.

The important thing is that monetary authorities should continue signalling that they won't tolerate and, still less, validate higher inflation.

Any signs of backsliding will cause a rapid reaction from the markets.

We have mentioned previously that, because of the forces of globalisation and international outsourcing, the secular trend is broadly deflationary. But there are also cyclical phases of moderate speedup or slowdown in inflation superimposed on the secular trend. Unless there is an increase in impediments to globalisation, in the form of protectionism, inflationary flare-ups are likely to be relatively mild.

However, there is also another basic scenario that has wide circulation in the investment community.

This one focuses on a broad repetition of the experience of the 60s and 70s, in which plentiful liquidity and easy US fiscal policy was followed by higher inflation, rising commodity prices and, subsequently, stagflation (a combination of high inflation and slow growth).

The latter scenario is negative for stocks and bonds, while being favourable to commodities and precious metals. This explains, in part, the preference shown by some investors for commodities. The investment rationale is to find asset classes that can act as a hedge against rapid and volatile inflation. One should hasten to add that commodities may also be favoured under the globalisation scenario, not primarily for reasons of inflation protection, but in terms of longer-term rising demand from rapidly-industrialising emerging countries.

In the globalisation and structural change story, there is limited upside to inflation because of the presence of competition - provided policies are not enacted to unduly hinder market forces. As a result, there is little need to raise interest rates substantially to prevent overheating and an inflationary build-up.

Among the major economic regions, only the US and China have strong growth and a bit of inflationary pressure. The Eurozone, as a whole, is operating below capacity and has only mild inflation, while Japan suffers from weak domestic demand and is still trying to escape the clutches of deflation.

As for trends in the United States, in the absence of substantial liquidity created by the Fed beginning in 2001, the US would have suffered a sharper slowdown than it actually experienced in 2001-2002. Easy policies pumped up the consumer, who has driven the economy until now - presenting the possibility of a better balance being achieved between consumption and investment, going forward.

Certainly, the policy created imbalances, but one can argue that this was a better option than risking recession.

Currently, it looks likely that tighter policy in both China and the United States will rein in their economies and prevent overheating and an inflationary surge.

As a result, global growth will slow down and asset markets will adjust accordingly.

This will set the stage for a reprise, once the adjustments have worked their way through the system. Given the impact of globalisation and the flexibility of markets, compared with the situation in the seventies, it seems unlikely that we will end up with an extended period of stagflation.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management and manages the LOM Equity Growth Fund. For more information on LOM's mutual funds please visit www.lomam.com.