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On the face of it, investors are spooked by interest rate worries. Monday's plunge on Wall Street came after US Federal Reserve chief Ben Bernanke spoke about inflation climbing to the upper limits of acceptability - the clearest hint yet that the Fed is not finished raising rates. But this is nothing new; markets have known for months that US inflation could be a problem and that interest rates may have to be raised on June 29, and perhaps two or three more times thereafter. Even if markets are only partially efficient - and overly complacent - surely the worst-case scenario of two or three rate hikes should have already been discounted.

What of rising oil prices? Could this lie behind the turmoil? As a single cause, this is unlikely - markets have watched oil rise for more than two years and brushed it off as having little long-term consequences. Tension over Iran? Another known quantity for months. The US housing bubble? Warnings about a bursting bubble have been around for at least two years. Of course, a combination of all the above could lie behind Wall Street's present instability. And for sure, an economy driven by cheap money must eventually suffer when interest rates rise. However, there is another possibility which few people seem to have considered yet: it could be that markets are in a swoon because of the added worry that the US economy is not only suffering inflationary pressures, but that it is also headed for slow growth.

In economics, a combined situation of slow growth and rising inflation is known as 'stagflation', a term coined in the 1970s to describe the industrialised economies after the first oil shock. Mr Bernanke has already warned that recent inflation trends are 'unwelcome' developments. Clearly then, this is a problem. With oil prices still rising, it's not likely that inflationary pressures are likely to ease soon. Meanwhile, not only were US consumer confidence and industrial production down in May, the latest US jobs report showed only 75,000 new non-farm jobs were created last month - less than half the figure that experts had forecast and the third consecutive month of slower jobs growth.

If stagflation is really a threat, Mr Bernanke faces some tough choices ahead. He can continue raising rates to combat inflation and run the risk of higher unemployment, or lower rates to stimulate growth and employment but risk higher inflation. Either choice is not good news for the US economy. For the rest of the world, the lessons of May are clear: stocks rose in a virtual straight line from 2003-2005 and many markets had overshot their fair values. With many major indices at all-time highs, a correction of some magnitude was only to be expected. If, however, stagflation is making a comeback - and there are flickering signs that markets are worried that it is - then it can only mean more trouble ahead.