Emerging Wild Card: Inflation (WSJ)

Price pressures in emerging markets could force central banks to tighten aggressively, roiling assets and currencies

By TOM LAURICELLA

While many investors have been fixated on the European debt crisis, concerns have been quietly building about the potential for inflation problems in emerging markets.

The fear isn't that emerging-market countries will return to the kind of hyperinflation that was so damaging in the past. Rather, the worry is that high food and energy prices, combined with capacity constraints and the Federal Reserve's easing move in the U.S., will force emerging-market central banks to raise interest rates more aggressively than is currently expected.

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That's especially the case in some Asian countries, which are seen as having kept interest rates inappropriately low because of concerns about the strength in their developed-market trading partners, such as the U.S.

"They probably have let inflation go further than they otherwise would," says Robert Horrocks, chief investment officer at emerging-markets specialists Matthews Asia Funds. As a result, "there is a real risk that these economies get overheated."

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