Concerns about global inflation, caused by the price hike in raw materials such as crude oil and copper, are becoming a reality. Some countries, and in particular the US, will face a major dilemma in attempting to contain inflation, as eliminating inflation might lead to a downturn of world economic growth.

According to the latest data, the US commodity index in May increased by 0.4 percent. During the first quarter, the labor cost increase was higher than expected and inflation, pushed up by labor costs, occurred. People are concerned that mild global inflation could skyrocket to excess and damage the forward momentum of the world economy.

This possibility is based on current supply and demand trends as well as currency exchange rates. The unstable situation in the Middle East, most recently exacerbated by the Iranian nuclear crisis and the damage to refinery capacity (possibly by cyclones or tornados), creates fears about oil supply, forcing up prices. Demand also is increasing with the huge purchasing power of newly emerged economic entities, which further contributes to the price hike. The other factor in the price hike is the effect of international opportunistic investment. As for currency exchange, since most trade in raw materials is calculated in US dollars, when the dollar is weak, it is natural that the commodity price will be high. An oversupply of US dollars will follow which in turn leads to an oversupply of global currencies. This causes a price increase in raw materials.

The tendency of global inflation in the future will be decided by three factors. The first factor is the international crude oil market. If current inflation trends continue, the world economy will face a great challenge. The second is the containment of international investment and the demands of newly-emerged economic entities. To date, the Federal Reserve's Exchange Rate Policy has somewhat contained international opportunistic investment, but due to the demand for raw materials, there is a possibility that opportunistic investment will grow beyond their control. The third factor is the coordinating capabilities of the big powers. If the US maintains the weakness of its dollar, and other economic entities don't care, then it is possible that mild global inflation would cause an economic recession across the world. Iran has announced it will establish a crude oil exchange market which uses the Euro. Russia is very much interested in the settlement of the Ruble, which will pose a serious challenge to the US dollar. Therefore it is of great importance that the US dollar reaches a reasonable exchange rate.

Not long ago, the Federal Reserve increased federal fund interest rates. This was the sixteenth increase in two years. This means of containing inflation may well be employed again. It is important to note too that that when large amount of funds return to the US market, they can cause a financial or currency crisis in newly-emerged economic entities. Experience shows that whenever the Federal Reserve policy changes from low interest to high interest, there is some financial crisis in certain newly emerged economic entities. If there is a lack of coordination, global inflation will have a negative impact - the instability of the international financial market and the increasing possibility of world economic slowdown.

The article is written by Guan Qingyou from the Global Energy Policy Research Program at the World Economic and Political Institute of the Chinese Academy of Social Sciences, and translated by People's Daily Online