The themes of political uncertainty and inflation have lately caught the attention of analysts and investors in emerging markets.
Discussions about the political outlook for emerging market countries have been stoked by events in parts of the Middle East and North Africa. These developments pushed up the price of oil, which is (among other factors) generally negative for the inflation outlook. Making matters worse, the oil spike coincided with rising food prices. This increases inflation pressures in emerging markets in particular because energy and food typically account for a larger share of the consumer price basket than in industrialized nations.
These are not the only inflationary threats. The strong recovery in many emerging economies and the related rise in capacity utilization have added to price pressures. At the same time, relatively loose monetary policy in a few countries has increased medium term inflation concerns.
However, these factors are by no means critical for the majority of emerging markets. Many central banks have started to raise interest rates and/or use other instruments to control inflation. China, for example, has imposed a higher reserve requirement ratio. Meanwhile, the latest inflation numbers in many emerging countries have been moderate and often well below the levels forecasted earlier this year. Further improving the inflation outlook for many economies is the chance that currency appreciation may help to mitigate inflationary pressures.
In short, while inflation is a challenge in a few countries, it remains controlled and well within the central bank's target range in most emerging markets.