AFTER three years of relentlessly rising oil prices, the greatest surprise about the present wave of fear over inflation gripping markets worldwide is that it did not come sooner. The two previous world oil shocks triggered severe outbreaks of inflation.

That this has not happened offers the significant reassurance that the “black stuff” has lost much of its power to upend Western economies. In part, that is due to greater resilience, as well as a reduced dependence on oil. But it is also substantially down to the second source of the inflation anxiety now exercising investors and the main central banks. This is the decision by the central banks themselves to hold interest rates in America, Europe and Japan at historically low levels for a prolonged period.

The rationale for these very low interest rates flowed from the lessons of the previous oil shocks, when central banks responded to the inflationary impact by raising rates sharply, leading directly to severe recessions. This time the central bankers have, rightly, reacted by keeping rates low while staying alert for signs that energy costs might feed through into pay demands, risking a “wage-price spiral”.

Fortunately, there so far has been little sign of such feared “second-round effects”; the impact of the oil price shock has been mainly a one-off. However, as Mervyn King, the Governor of the Bank of England, spelt out on Monday, the central banks have become fretful that they may have been too slow in getting interest rates to “normal” levels.

By keeping rates very low for a long period, the worry for Mr King and others is that they have stoked inflation — which will have to be curbed — and encouraged markets to push prices for assets such as shares to excessive levels.

Now, with the central banks suddenly sabre-rattling over long-postponed rate rises, markets have become edgy over inflation and dearer money.

The big question at the heart of all this is: will the inflation fears crystallise — and will investors continue to have cause to flee the markets? Fortunately, there are at least four reasons to think that the inflation scare may soon subside. The first is that wage pressures and so-called “core inflation”, which excludes the volatile cost of energy and food, have remained pretty muted.

A second is that a big source of extra inflationary pressure worldwide has come from runaway gains in commodity prices, fuelled by a speculative frenzy. A benign side-effect of present market turbulence is that commodity prices are now tumbling as these markets succumb to a typical boom-bust cycle.

A third reassurance is that the anti-inflationary downward pressure on prices from cheap production of goods in China and across Asia looks set to persist, especially given huge productivity gains still to be extracted in these places.

Last, and most important, the lagged effect of past, steep interest rate increases in the United States is still to be felt, and it takes longer for these to affect inflation than growth.

The consequence is that, in the US, at the centre of the inflation scare, the full impact of the Federal Reserve’s 16 previous rate rises is still be come through and continues to bear down on price pressures.

At the same time, a US slowdown may be already taking hold, which will exert yet more downward pressure on inflation there. Before long, markets may be worrying not about inflation, but about weakening world growth.

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