New sort of acceleration in China Brazil India elsewhere</title>

Inflation. It"s different this time.

It"s still got the same old causes:

Too much money pumped into the economy.

A huge economic stimulus that"s causing a shortage of goods and labor in some sectors.

Budget deficits and long-term debt that are spiraling out of control and leading to the steady erosion of the value of money.

How to fight inflation

What"s different, though, is inflation"s source -- the overheated economies of the developing world -- and the speed of its advance. This inflation isn"t creeping higher; it"s galloping.

Here"s the big picture:

Inflation is tame in the world"s developed economies at the moment, largely because growth in these still-damaged economies has been so slow.But inflation may already be running out of control in the world"s developing economies. That"s largely because they weren"t quite as damaged in the global financial crisis and have bounced back to rates of growth that were higher than those in the developed economies of Europe, Japan and the United States even before the crisis hit.

In the U.S., for example, inflation at the consumer level (measured by the Consumer Price Index) ran at an annual 2.1% rate in February. At the producer level, inflation ran at an annual 4.4% rate. Though a high rate of inflation in the Producer Price Index is often a sign of consumer inflation to come -- as higher wholesale prices lead to higher consumer prices -- the producer index actually fell in February.

See how the dollar is faring today

In China, on the other hand, inflation at the consumer level ran at a 2.7% annual rate in February. That would be nothing to worry about except that the rate is up strongly over January and December. China"s producer prices climbed at a 5.4% annual rate in February. That was a big jump from the 4.3% annual rate in January -- which was, in turn, a huge jump from the 1.7% annual rate in December.

India, Brazil, Vietnam and other developing countries are showing similar increases in their inflation rates. (For more on this, see my blog posts "Inflation is breaking loose in China and India" and "Will April bring higher interest rates in Brazil?")A new kind of export Inflation is kicking up so strongly in the world"s developing economies for five reasons:

Because their economies weren"t as hard hit by the global financial crisis, they"ve bounced back hard with the help of government stimuli. China"s stimulus, if you combine money from the government with an avalanche of bank loans, dwarfs that in the United States.

The governments of these countries don"t think they have much choice but to pursue pedal-to-the-metal growth policies to stay even with the demand of young and fast-growing populations for jobs.

These countries were experiencing strong inflationary pressures in key sectors -- food in India and China, raw materials in just about every economy but Brazil -- before the global financial crisis and the global economic slowdown. Today"s rise in inflation is back to business as usual in these sectors. In many instances -- raw materials such as iron ore or copper, for example -- increasing global supply requires investing in new capacity that can take three to seven years to get into production.

Most of these economies are built around export models, so higher growth means big surpluses of foreign exchange added to the money supply. Fast economic growth also makes these countries magnets for international capital, which again adds to the domestic money supply.

Many of these economies are riddled with classic supply bottlenecks. China, for example, has ambitious plans to expand its rail network but doesn"t have the domestic capacity to produce all the rolling stock it needs. Imports could supply some of the demand while China"s rail equipment makers geared up production, but the country"s export model works to discourage imports. So China"s rail and construction companies are left scrambling for the equipment and goods they need, driving up prices in the process. India"s persistent food inflation, to take another example, is made worse by an antiquated system of storage and transport that lets between 25% and 40% of some crops spoil before they reach market.

In recent history, the U.S. experience with inflation has been with either the slow, dragged-out, resistant-to-easy-cures inflation of the 1960s through the double-digit rates of the early 1980s, or the inflation threat of a few quarters that"s been quickly snuffed out.

We"re looking at something quite different now in the inflation developing economies are exporting to the global economy.

Growth in inflation in developing economies starts from a higher level because these economies emphasize growth over price stability (and who says they"re wrong to do so?). The European Central Bank wants to keep inflation under 2%. The target of Brazil"s central bank is 4.5%.

But, more importantly, we"re looking at a shift from a global economy where China and other developing economies were exporting deflation in the form of a larger and larger supply of cheaper and cheaper goods to one where prices are rising on the shelves at Wal-Mart (WMT, news, msgs).

And once the cycle moves from rising inflation to a fight against inflation, the effect will be much more dramatic than the usual slowdown in the global economy that results from, say, the United States slowing growth to fight inflation. Because the developing economies of the world have become the world"s factories, they"ve become the marginal buyers in raw material after raw material. It"s Chinese, Indian, Indonesian and Vietnamese demand that sets the price for copper and iron and nickel and, well, you name it. The rally in commodity prices that has helped pull global stock markets out of the dump has been built on a foundation of increasing demand from the developing world.

The financial markets are clearly afraid of what a drop in that demand would mean for commodity prices -- and the financial market is right to be afraid. Policies designed to fight inflation that slow the economies of China, Brazil, India and the rest of the developing world will send commodity prices tumbling. That will, if stock market action so far in 2010 is any guide, be enough to stall, at least, the rally that began in March 2009.

A subtler sort of inflation