Inflation is accelerating nearly everywhere, but most dramatically in the commodity-based economies. This has raised the hackles of world central bankers, who must now figure out how much they will need to tighten. However, the extent to which central bankers must raise rates will depend heavily upon whether the inflation we are seeing is more attributable to a relative or a cyclical shift in price levels. Relative price shifts tend to be more self-correcting and, hence, require less effort on the part of central banks to control.

For much of the developed world, the surge in commodity prices represents more of a relative than cyclical rise in price levels. Increase in the costs of oil and food, in particular, are crimping consumer budgets and causing demand destruction elsewhere in the economy. This, in turn, is bringing down the rate of inflation outside of the food and energy sectors. The reaction to surging oil prices in the U.S. provides a good example. Increases in prices at the pump have cut into non-oil spending, and forced retailers to mark down the prices of other goods. Apparel has gotten particularly cheap in recent weeks as many large retailers moved their July clearance sales into June to clear unwanted inventories. This is to say nothing of the drag created by falling home values, which has yet to show up in the consumer price index.

Prospects for inflation across the developing economies are more worrisome, especially among the commodity-driven economies of Latin America and the Middle East. We are also seeing a surge in inflation across much of emerging Asia. Those gains, however, are due more to a relative rise in food prices than to overheating. Indeed, economists in China argue the move by authorities to lift oil subsidies will only exacerbate the demand destruction being created by surging food prices. This is to say nothing of the disinflation that is being caused by accelerating productivity growth and excess supply of cheap labor migrating from the rural regions.