The recent surge in oil prices to new highs raises the risk that the world economy is headed for stagflation. Just as the 1990s was a period of stronger-than-expected economic growth and lower-than-expected inflation, the next several years are likely to produce the opposite: slower-than-expected economic growth coupled with higher-than-expected inflation. In many ways, the current macro-economic backdrop resembles that of the 1970s, when the world economy experienced its first serious bout of stagflation.

I see five main parallels between the current situation and that of the 1970s. First, the world economy must again digest a sharp increase in oil prices. Now, as then, oil prices have roughly quintupled, from $2.20 in 1971 to $11.50 in 1974, and from about $10 in late 1998 to more than $50 today. True, the oil shock of the 1970s was much bigger because the price increase occurred over a shorter period - mostly in 1973 - and because production was more oil-intensive than it is today. Context, also, is important: this year's oil shock was largely driven by stronger-than- expected physical and speculative demand for oil, both of which are side-effects of easy monetary policies around the world. By contrast, the 1973 oil shock was largely, though not entirely, due to restriction of supply by oil producers.