A global war on inflation

"However you want to measure … it's quite clear that monetary policy is very stimulative," says Nariman Behravesh, chief economist at Global Insight, a forecasting firm in Lexington, Mass.

For the first time, he says, an oil spike is being caused by rising demand in emerging-market nations. Many forecasters had expected that oil prices would retreat alongside slumping US demand, as had happened in the past.

This puts developing nations, and their central banks, in an important position in the current cycle.

"In the end, I think a lot of this has to fall on the emerging markets," Mr. Behravesh says. "They not only need to rein in their money-supply growth, but they also need to remove their subsidies" on energy use, he explains. Both policies have been inflationary.

From South Africa to India, many central banks have already raised interest rates. And some nations have reduced subsidies to consumers – including a major move by China recently.

Many nations are wary of changing policies too fast, given the risk of social instability as well as recession. But failing to act could also trigger a near-term slump – or an inflationary spiral that inflicts even greater damage on world economic growth.

Economists at investment bank Morgan Stanley found that about 50 nations show consumer prices up 10 percent or more from a year ago.

They warn that some central banks feel constrained, because they are focused on maintaining currency exchange rates against the US dollar. A weak dollar has caused loose monetary policy in nations with such "dollar-pegged" currencies.

Printing more currency

Central banks in these nations have to print more of their own currency to buy US dollars to hold exchange rates steady, explains Paul Kasriel, an economist at the Northern Trust Co. in Chicago. "That's not the only factor working here, but that is a factor," he says.

This is one reason that the Federal Reserve faces greater pressure to consider raising interest rates, even though the Fed has until recently been cutting rates to help the US economy out of a slump.

Mr. Kasriel says that other nations, not the Fed, should take the lead in fighting inflation. His reasoning: Even though the Fed's short-term interest rate is very low, at 2 percent, that doesn't mean that Fed policy is currently stimulative. Because of the economy's slowdown, the US money supply has actually been shrinking lately – and so has bank credit, a broader measure of the monetary situation.

"This is a full-blown credit crunch" domestically, Kasriel says, not an inflationary situation.

"If the Federal Reserve were to raise interest rates [now], that would send the economy into a deep recession," he says. But "it has to pay lip service to inflation."

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