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Global Inflation Rising At Double-Digit Pace

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NEW YORK — There is nowhere to hide from inflation.

Prices in one in four countries, many of them in emerging markets, are accelerating at a double-digit pace, which puts them at least two and a half times the 4 percent annual U.S. headline inflation rate, according to new research from Morgan Stanley.

That should be a wake up call for anyone counting on investments abroad to prop up their portfolios as U.S. stocks teeter on the edge of a bear market.

Sure, the "decoupling" strategy worked for investors in the recent past. Foreign holdings fared better because international economies were outperforming U.S. growth.

The U.S. economy has slowed to nearly a standstill in the last year because of the mounting inflation and the collapse in the housing and mortgage markets. Other industrialized countries have seen about a 2 percent average rate of growth while emerging economies have topped 7 percent.

That growth is now being threatened by inflation. And remember: In the developing world, a larger portion of household expenditures tends to go to the most inflationary items _ food and fuel.

Food prices have jumped 39 percent from February 2007 to 2008, led by wheat, soybeans, corn and edible oils, according to the International Monetary Fund.

That hits residents of emerging markets much harder than those living in more advanced economies. People in countries like Vietnam, Russia, Egypt and India put at least 30 percent of their total spending toward food, well above the 6 percent allotment for U.S. households, according to U.S. Department of Agriculture.

That's why Morgan Stanley economists Joachim Fels and Manoj Pradhan said they were "flabbergasted" by their findings that 50 countries had double-digit inflation rates. On that list were six of the 10 most populous countries in the world, including India, Indonesia, Pakistan, Bangladesh, Nigeria and Russia.

In total, those facing such pricing pressures accounted for 42 percent of the world population.

"In other words, close to three billion consumers are currently experiencing double-digit rates of price increases," they wrote in a note to clients.

Soaring inflation is not easy to tame. Some countries, such as India where inflation is running at around 11 percent, may have no choice but to boost interest rates.

The Reserve Bank of India earlier this month announced an inter-meeting rate hike. It said in a statement accompanying the move that the "overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations."

Others, however, will balk at tightening monetary policy because they don't want their currencies to surge, which would then raise the price of their exports.

Many emerging-market economies also link their currencies to the dollar, and because of the U.S. Federal Reserve's loose monetary policy stance right now _ the central bank has aggressively cut interest rates in response to the credit crisis _ that has helped feed inflationary pressures.

The longer inflation remains elevated, the more damage it will do to long-term economic growth.

"There is plenty of reason to worry about the continuation of the bull story for emerging markets, especially in those countries that have seen a sharp acceleration in inflation, are unable or unwilling to tighten policy sufficiently, and are commodity consumers rather than producers," the Morgan Stanley economists wrote in their report.

But even as prices surge, earnings forecasts aren't coming down in many global markets. That may give investors false hope that many countries will bypass the inflation storm.

For instance, in Asian countries outside Japan, earnings forecasts are still for 11.6 percent growth over the next 12 months and 15.1 percent growth in calendar year 2009, according to Barclays Capital.

Those estimates "are implicitly assuming that inflation will either miraculously disappear on its own accord or that central banks are not going to bother doing anything about it neither is particularly believable," wrote Tim Bond, head of global asset allocation at Barclays.

Barclays is recommending that investors either avoid owning stocks in that region or that they short shares, meaning bet they will decline.

"Although the area is currently outperforming in terms of economic growth, the inflationary environment is not far short of disastrous," Bond said.

Clearly, the inflation bogeyman is haunting all corners of the world.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org