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In but a few days, global investors have lurched from the happy hope that virtually every asset could continue going up at once, to the wrenching fear that inflation is about to surge. Markets have a memory, and certainly the trauma that inflation created for investors in the 1970s is still close to the surface. Is the surging price of gold and oil telling us that we are headed back to those days? Will inflation once again ravage the markets?

One must always remain vigilant. Markets, indeed entire economies, can turn in what appears to be an instant. Stuff happens. But in my view the sudden frenzy about inflation is misplaced. Powerful forces in the world economy continue to keep prices largely in check. Indeed, if anything, central banks in their determination to kill inflation before it happens may already have tightened too much.

Over the last decade, the world has experienced a series of brutal deflationary shocks. They started with the collapse of the Mexican peso in the mid-1990s. In 1997, much of eastern Asia's flourishing economy was leveled. Next were Russia, Turkey and Argentina; Brazil teetered on the brink. Meanwhile, Silicon Valley, the pride of the U.S. economy, was crashing, while entire sectors of the so-called new economy disintegrated. And Japan, the world's second largest economy, was locked in a financial crisis redolent of the 1930s.

After the tech wreck, everything from state-of-the-art fiber-optic networks to computer chips were dumped on the market, as desperate investors struggled to raise cash at almost any price. The main reason that it has become so easy for the advanced economies to source back-office support in Asia is because communications costs collapsed at the very moment that emerging markets were producing a skilled generation of information workers, eager to embrace a life-changing opportunity. The end of the cold war had similar long-term consequences, since it was followed by the integration into the world economy of virtually all of those countries which, by choice or not, had been excluded from it. The global supply of manufacturing labor more than doubled virtually overnight. In the context of largely open world markets, this has meant continuing downward pressure on global production costs. With upward of a billion people set to enter the urban labor markets of China, India, Brazil and Indonesia over the next 20 years, this pressure will only intensify. Should you doubt that, ask any labor union how much luck they have had lately in negotiating higher wages.

More immediate forces are also at work to keep prices from surging. Despite wishful thinking in some quarters, growth in Europe is slowing, not accelerating; both corporate and consumer sentiment, the best gauge of investment and spending, are falling. A large part of U.S. growth has been driven by booming real estate prices, themselves fueled by the ultra-low rates that the Fed adopted following the crash of U.S. markets in 2000. But in the last two years, the Fed has increased rates an unprecedented 16 times, so real estate-driven consumption is at best yesterday's news. Tomorrow's story will be the sharp fall in U.S. growth as consumers face higher mortgage costs. Real estate prices will fall, and access to credit will tighten across the board. This dynamic could become particularly nasty given the record level of household and public-sector debt, and the U.S.'s massive external liabilities.

Investor consensus is frequently wrong-footed by the market. In 2001-02, markets were gripped by the fear of deflation. Commodities were going for a fraction of today's prices, but virtually no one was interested. Today, investors are obsessed with inflation, while government and top-tier corporate bonds are shunned. That should be telling us something. What is it?

In the last few years, as the central banks of Japan, the U.S. and Europe took real financing costs to zero, or indeed lower, extraordinary amounts of debt-financed investment took place. Much of this investment is surely sound. Some of it just as surely is not. As the global credit cycle tightens, some of the more marginal investments will quickly become unsustainable. If at that point, central bankers were to remain obsessed with inflation, deeper and still more problematic cracks would open in the world economy. With investors reeling, the world carrying unprecedented levels of debt, and the U.S. sucking up virtually all of the world's excess savings to cover its own financial shortfall, this is not the time for a major monetary miscue.

What is really troubling markets is not so much inflation, for the factors that might drive global prices higher continue to be overwhelmed by powerful underlying forces. Rather it is the fear that central banks may already have tightened too much, and are set to tighten further. If that should happen, the market shock of last week would be merely the precursor to a still more dramatic quake.

• KENNETH COURTIS
• Kenneth Courtis on why the markets' tizzy over inflation makes no sense