The past fifteen years have been characterised by what some commentators call The Great Stability. The salient points of the Great Stability are low and stable inflation and low business cycle volatility. In this, it differs not only from previous decades, but also from previous low-inflation decades, which were characterised by substantial volatility on both counts (prices and output).

The Great Stability is a result of a number of coinciding factors. The most important of these are the shift to independent inflation-targeting central banks; and the downward pressure on prices of traded goods resulting from globalisation, notably the entry into the world economy of a large low-cost workforce, primarily from China and India. However, we may now be past the benign phase of globalisation and entering what for prices is a malign phase. Increased demand for resources and rising wages in the low-cost countries will push up global inflation. A key question is how central banks will react. Taking their cue from the 1970s. They are likely at first to negate inflation, rather than validate it (although the Fed may be an exception). This means that - over the next decade- we are likely to see higher nominal and real interest rates than we have seen during the Great Stability. The next question is whether this is a sustainable situation.

Gabriel Stein graduated from the Stockholm School of Economics with an MSc in 1980. In 1981 he worked for the International Relations Department of the Israeli Ministry of Finance. From 1982 to 1991 he ran his own economics and public affairs consultancy - Stein Brothers - first in Stockholm and from 1990 in London. He joined Lombard Street Research in 1991 and together with Brian Reading set up the World Service. Gabriel is a Senior Fellow of the Adam Smith Institute in London. Gabriel's insights into the current turmoil in financial markets and his forecasts of expected movements in world economies are often cited in Bloomberg and the Financial Times.