Inflation's many guises...

Inflation comes in different shapes and guises and the way it runs its course depends very much on the underlying environment.
Today we observe two distinct types of inflation across the world, a commodity driven type as observed in developed regions like the U.S. and Europe and a more economic activity driven type as seen in developing markets such as in Asia or the Gulf states. We could argue that the inflation in commodity rich developing countries are also commodity driven as it is the explosion in capital flows to these countries that is pushing their economies to the limit. But there is another factor that is playing a significant role in further fuelling inflation pressure, namely monetary policy. Many of these commodity rich countries happen to have their currencies somewhat pegged to the dollar. In order to maintain that peg, they have had to follow the Fed's switch initiated last September to a more accommodative stance on interest rates. This in turn has resulted in additional stimulus to economies that are already at full capacity. The risk of continuing in this path is that it triggers a wage/price spiral that, once it takes foot, is notoriously difficult to stop. This was the situation that developed countries faced during the oil shocks of the 70's when interest rates were kept dangerously low. Amongst the emerging countries, Brazil seems to be the one that has understood these risks most clearly as the central bank took action to mitigate the inflation pressure arising from economic activity by raising rates earlier in the year.
In developed nations, as mentioned earlier, the main risk comes from commodity prices remaining at record levels. Coupled with a sharp deceleration in economic activity, there is growing risk of fomenting a much dreaded stagflationary environment. Normally, given the positive correlation between economic activity and commodity prices, the economic slowdown should help alleviate some of the pressures that have built up but this is clearly not what seems to be happening. The reason might have something to do with the unprecedented environment in which emerging market economies don't seem to be faltering as they should (at least not yet) when their developed brethren enter a sharp slowdown. Maybe it is a question of time or maybe what we are witnessing is a paradigm shift!