Warren Buffett says that he is worried about stagflation. "We're right in the middle of it" he said, in an interview on Bloomberg. He is, of course, absolutely correct and leagues ahead of the denizens of Wall-Street analysts and economists who only a short while ago were denying that it would ever occur. Stagflation, just to remind you, means a combination of slowing growth and rising inflation.

Unfortunately, this is just what is happening in America, Europe and many other places. And, as you may have guessed, it puts policymakers in a tough spot. They would very much like to boost growth by lowering interest rates and providing liquidity, but with inflation on the rise that is a risky thing to do. Worse still, expectations of inflation are increasing and, with it, the risk that they will become entrenched.

Some people have objected that today's circumstances are different from those of the past and therefore we do not need to worry too much. Well, to any observer, it is obvious that structures have changed. Unionisation is lower, exchange rates are more flexible and economies are more open than before. Furthermore, technology has changed in such a way that production processes require fewer units of material inputs per unit of output than previously.

But the latter contention holds primarily for developed economies. Developing ones are less energy efficient and use more commodity-intensive processes. And, of course, they are growing very fast, resulting in a huge appetite for total commodity imports.

In a global economy that is increasingly integrated and has rapid financial transmission mechanisms, the ability of a sovereign central bank to fully control the impact of its policies is limited. When the Fed started an aggressive easing of monetary policy, last year, there was a spillover of liquidity into already hot emerging markets, leading to even higher prices for oil and some other commodities.

This not only led to some pressure for the prices of exported manufacturing goods to rise but also fed the global psychology of inflation fear. With the Fed seemingly willing to debauch the currency, the outlook for stocks cloudy, and bonds facing the possibility of serious re-pricing, investors latched on to oil as a good alternative asset. This has led to a continuing rise in the price of oil. Essentially, the boomerang thrown by the Fed came back and smacked it right in the face, in the form of higher imported inflation.

It should be noted that the role of speculation in energy markets has been much exaggerated. But the politicians need scapegoats and are keen on organising witch hunts to assuage public anger. There are proposals in the works to further regulate and control markets for commodity derivatives. But this is a very bad idea, which will eventually lead to less optimal resource allocation.

Another interesting aspect of recent events is that it has become clearer that the Fed is not necessarily the leader in setting the direction of monetary policy that other central banks are forced to follow. In the past, what the Fed did was often copied by most other central banks. But this time, a major bank in the form of the ECB, did the opposite of its American counterpart. Even as the Fed kept monetary policy easy, the ECB maintained a tightening stance. And it was the Fed that was forced to blink.

Last month, after Trichet said that they would be tough on inflation, and the dollar fell sharply, Bernanke's feet were held to the fire and he had to squawk about being concerned about inflation. It was an insincere statement that did not fully convince the markets. What the episode demonstrates, though, is the changing status of the Fed and the dollar in the global economy.

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Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com