Soaring Inflation Could Become as Destabilizing as Europe's Debt Crisis

In emerging markets, rapidly increasing food and energy prices have the potential to disrupt what’s been relatively steady economic growth. The International Monetary Fund, often late picking up on trends just like this one, recently points out that this inflationary menace could become just as troublesome for global stability as the already precarious state of European sovereign debt, particularly in the periphery.

According to the Telegraph:

“’In emerging economies, key risks relate to overheating, a rapid rise of inflation pressures, and the possibility of a hard landing,’ the IMF said.

“’With emerging markets now accounting for almost 40pc of global consumption and more than two-thirds of global growth, a slowdown in these economies would deal a serious blow to the global recovery.’

“The IMF has markedly increased its oil price forecast for 2011, from $79 a barrel in October to $90, and is now forecasting that food prices will remain high until ‘after the 2011 crop season’ as ‘weather-related crop damage was greater than expected in late 2010’.

“’Near-term risks are now to the upside for most commodity classes,’ it said. […] The global recovery will ‘advance’, the IMF said, but ‘remain uneven’.

“It added: ‘Downside risks arise from the possibility of tensions in the euro area periphery spreading to the core of Europe; the lack of progress in formulating medium-term fiscal consolidation plans in major advanced economies; the continued weakness of the US real estate market; high commodity prices; and overheating and the potential for boom-bust cycles in emerging markets.’”

The IMF makes its assessment in its latest World Economic Outlook, and points to “rising asset prices” and “rapid credit growth” as the main inflationary problems areas. With overheating visible in emerging economies and overwhelming sovereign debt in developed economies, there’s very real potential for turbulent economic conditions ahead. You can read more details in the Telegraph’s coverage of the IMF warning of how inflation is as great a threat as the European debt crisis.


Rocky Vega,
The Daily Reckoning