Too Much Money: Inflation Goes Global

In Spain and France, tens of thousands of striking truckers are blocking highways and border crossings to protest high fuel prices. In Egypt, police have clashed with throngs of protestors who barricaded roads after a cut in flour subsidies. And in India, riot police have used water cannons to disperse thousands of striking government workers in Kashmir protesting energy costs. These are but a few of the stories now making headlines around the world as protests against rising food and fuel prices gather pace.

Even as the world struggles with the continuing fallout from the U.S. credit crunch, it's fast becoming clear a new menace is now threatening the global economy: Inflation, the long-dormant bugbear of the 1970s and 1980s, has suddenly returned with a vengeance. And while much of the attention paid so far to the problem has focused on rising prices in the U.S. and Europe, the worrisome truth is inflation is also taking off throughout emerging markets.

Chinese inflation was 7.7% in May—down from a record 8.5% in April, but up from just 3.2% in the first half of last year. Indian inflation has risen from below 4% last August to above 8% last month. Russia's inflation has nearly doubled, from 7.6% to 14.3% over the past year. The problem is even worse in many smaller emerging markets. Inflation now exceeds 30% in Ukraine and Venezuela, and 25% in Vietnam. Saudi Arabia's inflation of 10.5% is its highest in 27 years. "It's very serious indeed," says Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington. "The problem is common to everybody."

Investors Won't See It Coming

On the face of it, the latest inflationary spike is linked to skyrocketing prices for commodities, notably oil and grain, but also many other metals and foodstuffs such as dairy products. Explanations include market speculation, poor harvests, and the weak dollar. But is it mere coincidence that so many commodity prices are shooting up simultaneously?

Probably not. Increasingly, many economists are arguing that spiking commodity prices are just the outward signs of a much deeper, and even more worrying, global inflationary surge. "I see no evidence that this is temporary or transitory," argues Harvard economist Kenneth Rogoff, formerly chief economist of the International Monetary Fund. Just as with the great inflations of the past, he warns, the true culprit is not shortages of select commodities, but too much money all around. "It's a disaster," warns Rogoff. "Investors are entirely unaware of what is about to hit them."

With the global credit-tightening still biting hard, it may seem surprising to argue that there's too much easy money. But there's a straightforward explanation for the seeming paradox. Although the credit crunch has led to fears of a serious slowdown in the U.S. and other developed economies, global price trends are more and more driven by emerging markets, notably China and India. In these countries, the credit crunch has had little impact, and economies are still roaring on full power—fueled by a surge in money supply.

Part of a Larger Problem

Many emerging-market central bankers and economists aren't alarmed yet, arguing that rising prices are the result of global forces outside local control and will abate when commodity prices cool off. Sachin Shukla, an economist at Indian brokerage Enam Research, notes commodities such as grains, metals, and oil account for 80% of Indian price increments. "The key question is: Will our policymakers overreact?" he worries.

The Great Inflation Debate