Up, Up and Away ...

Globalization used to be all about making things cheaper. It's hard to think of much that didn't go down in price over the past few decades—cars, electronics, consumer goods of all kinds, services like banking and telecommunications—as the global movement of goods, labor and capital played out around the world, enriching developed countries and emerging markets alike. In fact, between 2003 and 2007, world GDP grew 5 percent per year—faster than it ever has—even as inflation remained under 4 percent. Freer trade, cheaper emerging-market labor, better technology and more plentiful capital all collided to make this early part of the century the most prosperous in the history of our planet.

This sea change in global opportunity and prosperity is a compelling story. So compelling, in fact, that until quite recently, consumers, policymakers and even the bankers financing it all seemed to have forgotten there was a downside. With this unprecedented growth has come greater global demand for things such as labor, food, and energy.

And now, for the first time in 35 years, the world is facing a serious, and synchronized, surge in inflation. The increasing interconnectedness of global trade and capital markets that fed the boom is now speeding the dark side of globalization around the world faster than ever before.

You've likely felt the pain—inflation has hit most nations in the past few months—at the gas pump, or in a restaurant, or while paying a heating bill. But in vast swaths of the developing world, hyperinflation is already causing hunger, riots and political instability. In Russia, consumers have gone back to stockpiling food, as they did in the days of chronic shortages under the Soviets. They are now hoarding enough staples like flour, pasta and oil to last for months, lest 15 percent inflation make them too dear. China is facing record power shortages, as soaring coal prices and government-set electricity tariffs have forced smaller power plants to shut down. A Morgan Stanley report released in late June summed it up: "Much to our own surprise, we find that 50 of the 190 or so countries in the world now have inflation running at double-digit rates," including most emerging markets. In other words, about half the world's population is already experiencing double-digit price increases.

Policymakers are finally sounding the warning bells. Only a few weeks ago, European Central Bank president Jean-Claude Trichet declared that rising inflation was threatening growth in Europe, warning that second-round effects like spiraling wage inflation are becoming more likely (already wages in Germany are taking off). In June, U.S. consumer prices posted their sharpest rise in 17 years, leading Fed chairman Ben Bernanke to tell Congress that bringing down inflation to an acceptable level was now "top priority." A July report from the Asian Development Bank urged policymakers to abandon their decades-old focus on growth and start fighting inflation lest they suffer a worse fate: stagflation. That crippling combination of low growth and high inflation immiserated the West three decades ago, and would represent a complete reversal of the golden age of globalization.

The comparisons to the '70s are rife these days (even Bernanke has made them), and some are apt. Then, as now, an increase in government spending, and irresponsibly loose monetary policy, encouraged inflation. But the differences matter more. Back then it was developed nations that were causing the pain, and feeling most of it: from the early '70s to the early '80s, the unemployment rate in OECD nations rose from 3 to 7.8 percent, as prices rose more than 10 percent per year. Now it's an emerging-market phenomenon. Nations like China are starting to export inflation as their explosive growth and voracious demand for resources push up world commodity prices. In the United States, food and oil now account for about half of inflation; the figure is around two thirds in Europe, and even higher in some developing nations.