Rather than inflation, it may turn out that economic volatility is the true test facing equities in the years to come.

Coming in the wake of an almost unprecedented set of circumstances and policies, the outlook for growth and inflation is extremely murky. For equity investors that means there is far less certainty over both the outlook for profits and how to value them than they had grown used to in the 25 years to the onset of the current crisis.

It is not simply that very low interest rates and bloated central bank balance sheets may cause inflation. That is true, but it is also possible that Japanese-style deflation takes hold. There is a higher chance now of wild swings in inflation, growth and monetary policy than any time in the post-World-War-Two period.

This again is about the death of the so-called Great Moderation, a construct that held that economic growth and inflation had somehow become more biddable. That was largely an illusion, but as long as it lasted investors became more willing to pay more for company profits. The steadier economic growth is, the more predictable corporate profits become. Steady inflation too is a huge boon to investors; it allows for easier discounting of future cashflows and also leads to fewer gut-wrenching mistakes by policy-makers. It is, after all, a lot easier to travel 60 miles on hour on a straight, level road than on one with sharp curves, steep climbs and sudden downhill legs.

Long periods of moderation tend to amplify this effect. Investors become more and more willing to up the multiples they will pay for given streams of future earnings.

What is interesting about the current period is not that investors thought better of their former easy confidence but how quickly something like that confidence has come back. Price/earnings ratios in the United States - currently in the 14 to 15 neighborhood - have begun climbing once again and are at levels below recent peaks but still far above where they were for much of the 1970s and 1980s. PE ratios fell during most of the last decade, driven downward by the popping of the dotcom bubble more than the evaporation of the Moderation mirage.

The volatility of inflation has already spiked higher, to levels not seen since the 1980s.

"We've moved into a rare area...where valuations are far above their typical levels for the current level of economic volatility." William Hester of the Hussman Funds wrote in a note to investors.

That may well be because investors are betting not that policy-makers are going to be able to stoke growth and control inflation at the same time, but rather that they will stop at nothing to reflate the economy.

Betting on Bernanke and against Depression was clearly a good strategy in 2009, but it seems the situation is far more complicated now.

Tim Bond, strategist at Barclays Capital in London, thinks stock market valuations are fair value now, more or less, but sees them being pressured in coming years by a combination of factors, including economic volatility.

Demographics, bond argues, will offer dwindling support for equities as the baby boom generation ages and begins to retire.

As the late middle-aged prepare to retire, they are likely to hold less in equities, while those actually in retirement will have to begin to eat their savings.

That should pressure equity valuations for at least a decade unless, of course, Chinese and Indian savers suddenly and unexpectedly acquire a taste for developed market equities.

I'd bet the traffic mostly runs the other way.

It is also true, and puzzling, that lower levels of global economic growth now appear to be needed to stoke commodity inflation.

This, if sustained, will be a headache for central bankers and investors from Beijing to Washington.

In the end, as we have had an officially engineered reflation, the biggest risks to PE ratios come from official policy mistakes.

These are of two types: the deliberate and the inadvertent.

A central banker now has a much more difficult time knowing what the actual state of the economy is. No one really understands what will happen to US interest rates as Fed support ends: not you, not me and certainly not the Fed itself.

No one knows either when or how banks will begin to lend again in force, stoking the speed of money in the economy, and with it inflation.

The Fed could, in good faith, get it horribly wrong.

Further, unemployment is high and will take years to fall to acceptable levels. Continuing to run huge deficits may be the right thing to do in that circumstance, politically, economically or morally, but it is hard to argue that it won't create temptations for central bankers and raise the risk of economic volatility.

Pricing that risk may take a while, but the effects for equities will be profound.

James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at http://www.reuters.com/news/globalcoverage/columns