Federal Reserve

Is inflation on its way back to the west?

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Shoppers and investors could be hit with higher inflation sooner than they are bargaining for, economists warn.

Inflation across the developed world has been low or non-existent for several years now, but with the U.S. Federal Reserve expected to act soon on interest rates, analysts expect it could take off sooner than forecast.

Stock markets are on tenterhooks ahead of the Fed's decision on Thursday, when many believe its rate-setting committee under Chair Janet Yellen will raise rates for the first time in more than a decade.

As the west tries gradually to return to normal monetary policy after the global financial crisis, central bankers are trying to emphasize stability and continuity. Many economists agree that the sustained period of low-to-zero inflation is likely to continue.

However, analysts add that the inflation cycle may be hard to control -- particularly if commodity prices rebound from their current lows. If consumers take advantage of low oil and food prices, and the consequent extra buying power they have, to get back into the shops, this could also start to push inflation higher, faster.

"We are still in the reflation phase of the natural evolution: deflation-reflation-inflation," French bank Societe Generale's cross-asset research team wrote in its quarterly note this week.

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"Inflation risks are set to re-emerge on the back of reflationary policies in many areas. Even in the US, monetary policy normalisation should be subdued and the Fed is expected to remain behind the curve, triggering inflation risk."

Heightened risk of inflation should concern everyone from ordinary shoppers to Yellen.

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Deutsche Bank's chief economist, David Folkerts-Landau, warned of the potential consequences of surprise inflation in an article this week, calling on central bankers to normalize sooner rather than later: "Zero rates are a recipe for excess inflation down the road. The longer the wait, the higher the risks. If inflation does break out, the Fed will be forced to tighten aggressively, causing far more damage to the US and global economy than starting now," he wrote.

In contrast, Capital Economics argue that it is the U.S. which is the only major Western economy at serious risk of rising inflation, because of better wage recovery than elsewhere. Its global economics team forecasts both headline and core inflation to rise from close to zero this year to exceed the Fed's 2 percent target by early 2016 and "rise steadily thereafter" – prompting the central bank to raise interest rates more quickly than forecast.

Banking on rapidly rising inflation might be too bold a call for many. After all, there is also the possibility that commodity prices – in particular the oil price - do not recover because of unforeseen reasons, such as oversupply continuing for geopolitical reasons, or a currency war.