Many of our customers have begun asking in the past week whether the world is heading for stagflation. We have replied that this cannot be entirely ruled out. Global monetary policy was unusually easy at the start of this upswing (2002-2006) and this helped create a very broad upswing in which commodities and emerging markets, in particular, have been strong. The global economy is now flirting with the limits of capacity, both in terms of commodities and labour- and in the rich countries too. Unemployment in the OECD area is now at a twenty-year low. One can draw comfort from the fact that inflation continues to be low, inflation expectations are "well anchored" and low unemployment has only in a few places led to a noticeable upward pressure on wages. But it would perhaps be unwise to entirely rely on this analysis. As far back as in 1999, the BIS noted that the "offer ratio" had risen markedly in almost all countries since the 1970s and 1980s. The offer ratio expresses by how much unemployment has to increase in order to reduce inflation by 1%. In other words, inflation has become more sluggish. It rises more slowly during an upswing than it did in the old stagflation days of the 1970s. But is the flipside of the coin then not that it can be expensive and difficult to bring inflation down if it becomes too high? This is the question that central banks in countries with very tight labour markets, such as Iceland, Norway and the USA, must ask themselves. In the USA, inflation has been slowly creeping up over a number of years, and a recession would probably be required to prompt a significant fall. If the US economy pulls out of the current slowdown, the Federal Reserve will be forced to create this recession (in 2008?) and we will again hear much talk of stagflation.