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Despite the fact that the IMF sees inflation across developing countries falling to 5% in 2011 from around 5.75% now, the WSJ notes that there are three main sources of inflationary pressure in emerging economies: commodity prices (specifically cereal and overall food prices); efforts to prevent currency appreciation (interest rate hikes; unsterilized interventions due to high borrowing costs–especially relative to developed governments); and declining output gaps/tightening labor markets (whereby aggregate demand pressures aggregate supply, creating higher production costs in the process).  The author opines that “emerging market property and consumer stocks could offer an attractive hedge against inflation, particularly given growing domestic demand.”  Interestingly, the piece notes that in emerging Asia, food accounts for 40% of the average CPI basket.  Yet consider Nigeria, where food comprises nearly two-thirds of the inflation index basket.  If emerging economies are struggling with inflation, the problem would theoretically tend to be magnified in most frontier markets.

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