While its always interesting to see statistics presented in novel and innovative ways, it sometimes seems that the message can be lost amid all the fancy graphics and bells and whistles. Nonetheless, the chart produced by the WSJ does quite clearly highlight the growing inflationary trend across most developing nations, versus fairly benign inflationary conditions in the more developed nations.
For example, the graphic below shows the level and change in inflation across developed nations. Nothing much to worry about. In fact the data indicates that if anything deflation still remains a risk (albeit a rapidly diminishing one). In reading the chart, the darker the red, the higher level of inflation. Blue shaded areas conversely represent periods of deflation.
If we then compare the above data to the same chart, but this time for developing nations, the difference is clear. While not every emerging market falls into the high inflation category, it is obvious that those countries which are growing the fastest are experiencing relatively high rates of inflation, and increasing ones at that.
In many ways this is to be expected a faster growing economy generally goes hand in hand with an increasing rate of inflation, as a higher level of demand in terms of investment and consumption, results in price pressures across the economy. Another factor however is also responsible for rising inflation in many markets, namely the reluctance of monetary authorities to increase interest rates. This reluctance stems largely from a desire to avoid seeing their currencies appreciate against their key trading partners, specifically the USD and the euro.
The determination of the US and Europe (to a lesser extent) to engineer export-led recoveries, which is helped (or is it required?) by a weak currency, has nasty implications for fast-growing emerging markets. If emerging market monetary authorities increase interest rates to combat inflation, they will imperil their own economic growth as their currencies appreciate, making their exports less affordable in well-off Europe and the US. And if they dont increase interest rates, they risk damaging their economies through high inflation.
Theres no doubt that the economic recovery will come largely at the expense of the developing world. Its no coincidence that most criticism of the Feds weak USD policy comes from the large emerging markets. The question is, what will they do in response?
