While all around the panic relates to inflation, and that we are in danger of seeing a re-run of the 1970s, more evidence emerged yesterday to suggest that the reality is quite different.

The 1970s, remember, were characterised by rising unemployment and rising prices.  The Great Depression was characterised by rising unemployment and falling prices.

The 1970s crisis was initially kicked off by a surge in the price of oil, which led to an upward spiral of wage inflation.  The era was characterised by strong union activity,  and loose monetary policy with negative real interest rates in many economies.

The 1920s/1930s depression was initially kicked off by falling asset prices, followed by banking collapse.  It was a similar story in Japan in the 1990s.

When the stock market crashed in 1929, major indices did not return to their previous high until the early 1950s.House prices fell in the UK during the 1930s.

In a way it would actually be quite good if the present crisis was more like the earlier one. Policy makers in the 1920s and 1930s, and Japan more recently, made a series of mistakes. Japanese banks were slow to admit to the full extent of their losses.  It seems unlikely fingers crossed, those same mistakes will be repeated.

But the similarities with the 1970s are obvious too.Oil keeps rising.  Although oil is much more expensive, even after allowing for inflation, than it was the 1970s, these days our consumption of oil takes up a smaller proportion of GDP.  Oil would need to approach $200 and demand stay at current levels before our oil consumption to GDP was comparable to the 1970s.  It does, however, seem quite possible this will happen.

Evidence of mounting inflation is everywhere and around the world.  In the UK, producer price inflation keeps hitting new all-time highs.  But inflation is also a major problem in developing economies, including China, India, Russia, Brazil and Eastern Europe.

In the UK, evidence has emerged to suggest a new wave of strikes may begin.  If inflation worsens, and union pressure leads to inflationary wage increases, then the only possible medicine will be sharp rises in the rate of interest, just at a time when slowing consumer spending, collapsing house prices and struggling industry suggest a desperate need for interest rates to be slashed.

But here is the other side of the argument, an argument that was strengthened yesterday.

Markets are down again.  The FTSE 100 fell to 5723, 700 points below its start-of-year price. It is now 1,000 points below its seven-year high set last year, and more to the point is 1200 points below the all-time high of 6930 set on the last day of the last millennium. So in effect we are sill in a bear period. A bear period lasting eight and a half years which we think is the longest bear run since the big one kicked off in 1929.

In the US, it is not quite so severe. The Dow hit its pre-dotcom crash peak on January 14 2000 with a score of 11722.  It passed that level in 2006, and at no stage this year has it fallen lower although it did go within 20 points in March of this year.  Right now the Dow is over 300 points above that mark although it has fallen 500 points this week so it is quite possible it will fall below that mark soon.

But bear in mind the 1930s, 1940s and early 1950s saw either deflation or very modest inflation.  Inflation today is much higher, and after allowing for rising prices, it seems the Dow is actually lower today that’s in real terms, than in 2000.

More to the point, the NASDAQ is still only half of the heady heights it reached during the dotcom peak.

In other words, it is not just house prices that are falling off the edge of a cliff; US and UK major indices have suffered an appalling eight years or so.

But then yesterday also saw the unveiling of the latest UK job statistics.

It made the TV and radio news headlines UK unemployment rose by 38,000, hitting 5.3 per cent, from 5.2 per cent the previous month.

It is no surprise.  Sven-Goran Eriksson and Avram Grant are not the only people to have joined the dole queue lately.  We all know that over the next few months jobs will be lost in the City, in retail and the housing sector.

Then again, by historical standards, unemployment is still low; will it stay low?

And this is when the debate gets interesting.

Because yesterday, to accompany news of the relatively small rise in unemployment, came another statistic which was more significant, but has not fallen under the full glare of the public spotlight.

Average earnings, including bonuses, rose by 3.8 per cent in the year to April 2008, down from 4.0 per cent in March. Average earnings, excluding bonuses or regular pay, rose by 3.9 per cent in the year to April, up from 3.8 per cent in March.

Remember, the retail price index rose by 4.2 per cent in the year to April.  So it appears earnings have not kept pace with inflation.

Normally, wages are only creating inflationary pressure if their rate of change, minus improvements in productivity, is above the official inflation target.  Economic productivity rose by 1.7 per cent over the year, so yes, wages are going up a little faster than they should, but only by a tiny amount.

Unions do not the have the muscle they once did. A repeat of the winter of discontent seems unlikely.  There has been plenty of anecdotal evidence to suggest some workers at least are accepting pay cuts.

This is a trend to watch. So far it would seem that despite the escalating rises in oil and food, the dreaded secondary effect on wages is just not happening.

This is good news, but it could turn to bad news.  Central banks need to watch this very carefully.  Remember, there is typically an 18-month time lag between a change in the rate of interest and its full impact.

The combination of rising unemployment, falling asset prices both property and equities, and modest wage rises which could easily turn into wage falls, means there is a real threat of deflation.

The challenge facing central banks is to anticipate deflation 18 months in advance, so that they can relax lending in time. 

Right now, central banks seem to have an almost unprecedented balancing act.  The economy could go either way inflation or deflation.  One wrong move and it could be disastrous.

Senior management at commercial banks may be overpaid, but right now, central bankers deserve every penny of their remuneration.