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Rising inflation expectations, rather than deflation, is the new fear. Warren Buffett – the man who said the US economy had “fallen off a cliff” – believes inflation could return to 1970s levels. Jim Rogers – the man who said the UK was “finished” – expects much the same. Pimco, the bond fund, sees similar risks.

Markets for now don’t seem too worried. Interest rates have collapsed, central banks may be printing money and governments such as the UK’s heading for their largest ever peacetime deficits. But break-even rates, the yield difference between inflation-linked government bonds and normal government paper, have risen only slightly since last year’s trough. At about 1 per cent in the US and the UK, they are near historical lows. Most economists feel the risks of doing too little in the fight against deflation are greater than the possibility of a build-up of inflationary pressure in a year or so.

But for how long will inflation be merely tomorrow’s problem? Right now, many prices are falling, especially for exported goods. That sends a deflationary impulse round the world. Over time, the ratio of traded goods to non-traded goods prices should be constant. So, as traded goods prices fall, so should non-traded stuff – things like houses. Unwinding the credit boom of the past 10 years will also require higher savings, weak consumption and low investment, well into the next decade. This means demand will remain weak, and with it inflation.

But the trigger for an inflationary spike might lie on the supply side instead. Oil prices are edging up, after output cuts by the Organisation of Petroleum Exporting Countries.

Similar constraints could do the same elsewhere. Imagine a company cut off from fresh credit. It can’t roll over old debt. It can’t afford much working capital. So it shrinks itself. All it would take is a modest pick-up in demand for the company to hit capacity constraints. Generalise that picture to whole economies and inflation would follow fast. Helpfully, that would erode the real value of debt. The credit crisis would have then generated its own solution.

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