Developed markets should expect inflation

INTEREST rates may still be at all time lows in the developed world but inflation is the only story in town for much of the emerging world. It will soon be the same story in the West.

In 2008, spiralling food prices brought people in Asia, Africa and Latin America onto the streets. Many fear we could see similar scenes this year as families struggle to feed their families.

The UN’s Food and Agriculture Organisation has warned that millions of people are at risk after its world food price index broke through the peak 2008 levels. Wherever one looks across the emerging world, there are signs that inflation is becoming an increasingly important policy issue.

China officially reports inflation of around five per cent but as one guest told me this week there are many that think the real number is considerably higher.

The Beijing government has been taking action to curb house price inflation for many months, and food prices are also on the move.

The Indian government, meanwhile, says it will take further measures to fight food price inflation as December data shows a more than eight per cent jump in prices.

Korean authorities increased rates to cool prices last week, surprising the markets with their timing. Last but not least, Singapore continued its inflation fighting this month too by tackling house prices, just as China has done for many months.

The floods in Australia add another dimension to the inflation story. An anticipated reduced output of coal and wheat is already putting upward pressure on spot prices.

The decision in many developing economies is being made tougher by the fear that a rate hike will have the counter-productive effect of attracting more speculative money flows. As a result, we’re seeing central banks becoming more creative in introducing capital controls, instead of straight rate hikes. Brazil is a case in point.

As RBS points out, market expectations of rate hikes in the UK have increased since the start of January. The high street giant Tesco has already warned about higher prices and “incredible petrol inflation”.

The US does not seem as worried about deflation as it was last year, for good reason. The US media is now talking about the possibility of $4 gas by the summer. A US-based investor told me that such elevated petrol prices would kill consumer demand.

It is only a matter of time before inflation and rate increases make become the biggest story in developed markets too. Beware: it’s going to hurt.

Anna Edwards co-anchors Capital Connection and Squawk Box Europe weekdays on CNBC.