The consensus is that inflation is burning itself out and that we now face a more conventional global slowdown. Oil prices, for example, staged their biggest one-day drop last night since 2004 on signs of easing tensions in Georgia. But supplies remain tight and vulnerable to new supply shocks. And credit concerns remain, which may force up spreads and force central bankers to ease policy more aggressively. Many investors, therefore, remain unconvinced that inflation is behind us entirely and Treasuries, which should rise as the prospect of inflation abates, fell overnight, even as the dollar tip-toed upward with the rally in stocks. That would be symptomatic of a return to risk appetite, which doesn't make sense if you're expecting a global slowdown. Yet Asian equities are rallying on the back of Wall Street's big jump last night. Fed chief Bernanke still warns that the outlook for inflation remains uncertain. Indeed, some economists think Bernanke cut rates too fast and still needs to raise them to snuff inflation out once and for all. Lower prices will tend to stoke relatively inelastic demand for essential commodities like food and oil, particularly in emerging markets where growth is projected to remain just below 10 per cent. Persistent credit issues, combined with the possibility of more rate cuts, could further weaken the US dollar, moreover, contributing to commodity price increases. There are still shortages in China for things like copper that are mirrored throughout the emerging world. In the UAE, for example, much of the inflation is not imported, but the result of systemic bottlenecks driven by economic growth and speculation in property. With signs emerging that the property slump is spreading to emerging markets, including Dubai, things may change rapidly. The tendency in the market is to focus on the area where it gets the most information, i.e. the US and Europe, and extrapolate outward into more opaque global markets. US demand is certainly falling. The outlook for auto sales looks grim, which could feed into prices for a range of commodities, from metals to oil for gas tanks and plastics. And Bernanke has made it clear in Jackson Hole not to expect good news from the US economy. One major source of concern is that foreign central banks, mostly China, will now pull back from buying the debt of Fannie Mae and Freddie Mac. China has been buying in excess of $60 billion a week of the so-called agency debt, thereby recycling its ballooning currency reserves and keeping US interest rates lower than they might have been given the size of its current account deficit and the worsening housing slump. But now China's purchases appear to have fallen off a cliff. Concerns about the health of the two agencies, which are vital to the functioning of the US housing market, are no doubt one reason. Another reason may be that China is finally going to do what the US has always urged it to do: channel more of its savings into domestic investment to create a demand-driven economy. In my column last week, I wrote that many economists in Asia expect China to try to kick-start its economy with fiscal stimulus in the wake of the Olympics - when China put the industrial sector into deep-freeze. If China decides to draw on its foreign exchange reserves to increase domestic liquidity and allow the renminbi to appreciate, it could end what Brad Setser calls the "quiet bailout" of the US by foreign central banks. While it might seem more likely that China would not allow the appreciation of the RMB, but rather try to keep it stable to stimulate exports for a quicker fix to its slowdown, the fact that demand for exports is so weak while China's demand for infrastructure and jobs is so great could prompt new thinking in Beijing. warnold@thenational.ae