Inflation Rears Its Ugly Head

06/18/2008 12:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, say the signs of inflation's return are inescapable, though they're much more visible overseas-for now.

Suddenly, there's a lot of talk about inflation in official circles, and that wasn't the case before. This month alone, comments or inflation warnings were made by the Federal Reserve, the European Central Bank, and the Bank of England. The International Monetary Fund was the most direct, warning that global inflation has reemerged as a major threat to the world economy.

As we've often pointed out, inflation has been creeping back, and it's gaining momentum. In the past six months, for example, we've seen some huge double-digit annualized jumps in US wholesale prices, along with soaring money supply. But what's happening in other countries is even more interesting, and it's intensifying the global inflation concerns, which gold saw coming way back when.

As you know, many developing nations have been booming, thanks to globalization. It's estimated that half of the world is leaving poverty behind as standards of living improve. That's especially true of the BRIC countries (Brazil, Russia, India, and China), which are the emerging market leaders.

As living standards improve, people in emerging nations are able to buy things they couldn't afford before, like food and cars. This has greatly increased demand, and it's been the driving force behind the commodity boom. But there's a price to pay: In this case, it's inflation.

Inflation is picking up in most countries. Aside from Argentina, inflation is above 15% in many more emerging countries like Vietnam, Latvia, Estonia, Pakistan, and Egypt. It's more than 10% in a lot of other countries and it's a huge concern in Russia, China, and India.

The bottom line is that inflation is at a ten-year high in emerging countries, and The Economist says that two-thirds of the world's population will probably suffer double-digit inflation rates this summer.

Global monetary policy is now the loosest since the 1970s, and money supply is growing almost three times faster in emerging countries than in the developed world.  Plus, as The Economist points out, there are alarming similarities between emerging economies today and the rich world in the 1970s. For example, in many emerging countries policymakers view the inflation rises as a short-term phenomenon, and they're taking superficial measures to deal with it.

It's still to be seen how this will end. But so far, this inflation rise is coinciding almost perfectly with the 200-year commodity cycle we've often [discussed]. If this continues, and we believe that it will, then there's a lot more inflation to come in the years ahead. In fact, gold's been telling us this all along. Now we're starting to see why.

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