The inflation outlook for 2008 in the U.S., Japan, euro zone and the UK rose again in June, triggering big revisions to economists' interest rate forecasts, Reuters polls showed on Thursday.
Reuters monthly surveys of about 250 economists showed the consensus inflation forecast for the U.S. and UK have been raised in six of the last eight monthly surveys, and in seven of eight for the euro zone.
Suggestions from the European Central Bank and Federal Reserve that the next move in interest rates may well be up now have economists phasing out the cuts they had expected for most of this year.
Yet they are still some way out of step with financial markets that are pricing in several hikes this year in the U.S., UK and euro zone. In Japan, a hike is not forecast until early next year as inflation creeps higher from very low levels.
Growth still looks likely to cool substantially in the G7 this year as a near one-year-old credit crisis continues to unfold, and there is no sign growth will pick up much heading into 2009 either.
"Inflation risks have become more important for the Fed and other central banks," said Scott Brown at Raymond James, who expects a quarter point hike to 2.25 percent by year-end.
Economists as a whole expect the Fed to hold rates at 2.0 percent this year after 3.25 percentage points worth of cuts since September. But that is way off the 75 basis point increase priced into rates futures markets by year-end.
U.S. headline inflation is pencilled in at 4.0 percent this year, up from the 3.7 percent seen last month, while core inflation is expected at 2.3 percent, the same as predicted in May.
In Europe, economists have heeded ECB President Jean Claude Trichet's warning that rates will possibly head higher next month, but they still remain convinced he will reverse that move by the first quarter of 2009 as growth cools.
Inflation was a record 3.6 percent in the 15-nation bloc in the past month and is forecast to average 3.4 percent this year, sharply up on the 3.1 percent seen in May's survey.
Similarly, economists have moved away from pricing in more than one cut this year by the Bank of England, in stark contrast to the two hikes for this year the market has priced in.
Huge spikes in oil and food prices across the world will also likely drag on economic growth this year.
Economists even downgraded their consensus forecast further for U.S. growth to 1.1 percent this year on a fourth quarter over fourth quarter basis, from 1.2 percent last month. They also still put a 50 percent chance the U.S. will slip into recession in the next 12 months, unchanged from last month.
While a significant pick-up is seen next year for the economy to turn in 2.3 percent, that is still in sub-trend territory for the U.S. economy.
"The recent spike in crude oil prices virtually guarantees that the stagflationary environment settling over the U.S. economy lingers into 2009," said Scott Anderson at Wells Fargo.
"The consumer is facing 80 mile-per-hour headwinds that can't be ignored."