A global war on inflation

With inflation a rising threat, nations around the world are trying to navigate a delicate task: containing that price pressure even as the linchpin US economy reels from the opposite challenge of a credit bust.

If all goes well, the global economy will muddle through.

But signs of how difficult this will be are all around. Rising unemployment in America, for example, shows that the risk of recession is real – and could potentially spread worldwide.

Global inflation is growing harder to ignore. Oil, which has become the main symbol of global inflation, traded at a new record Monday. And European inflation has reached highs never seen under the euro currency. By one new survey, 3 billion people – 42 percent of the world's population – are experiencing double-digit annual rises in consumer prices.

That's why many nations have begun to tighten their credit reins in an effort to curb inflation. This Thursday, forecasters expect the European Central Bank to join the battle by raising its interest rate. Sweden and Indonesia may do the same that day. Even the US Federal Reserve has been forced to consider a tighter policy.

"It's conceivable that the synchronized tightening by all these emerging economies and the European Central Bank [could] cause a global recession, which would bring oil prices down," says Ed Yardeni, an economist who heads Yardeni Research in Great Neck, N.Y.

For their part, central bankers are hoping to contain oil prices without causing a slump.

Mr. Yardeni predicts the world economy will trudge through the mess, with recession confined mainly to the American economy.

About the only thing economists see eye to eye on these days is that the path forward is lined with more challenges and uncertainties than a year ago.

On Monday, the Bank for International Settlements in Basel, Switzerland, sounded a cautionary note in its annual report.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth, and temporarily rising inflation," the report said. That mix "does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

In this environment, a crucial question is: How many nations need to tighten monetary policy, and by how much?

Conflicting analyses

Some economists worry that the world's central banks have not yet awakened to the magnitude of the inflationary threat. Others say that the interest-rate moves under way, and those likely in the months ahead, will bring prices under control, assisted by the general weakening of economic growth.

Where the two sides agree is that monetary policy worldwide has been generally loose – and that this has been a major factor propelling fuel and food prices.

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