Up, Up and Away ...

The fact that today's inflation is almost entirely related to commodity spikes is another crucial difference from the 1970s. Back then, in the United States, for example, food and oil represented about 30 percent of total inflation. Core inflation—the sort that doesn't include food and oil—was spiraling; today, by contrast, it is relatively steady (at least in the rich world). The conventional wisdom was that inflation spikes in food and oil are not worrisome, because those prices tended to fall back to long-term averages. Now food and oil prices appear to be rising inexorably, due to the long-term rise in demand from emerging economic powers like India and Russia, slow productivity growth in agriculture and supply disruptions in the oil patch. Those trends make it "quite possible that overall inflation will stay higher than it has in the past," says Holger Schmieding, chief European economist of the Bank of America. With global inflation now nearly 6 percent, it looks unlikely to fall back to its 2007 level of about 4 percent—much less the 3.5 percent rate of earlier in the decade—any time soon.

Many firms are beginning to rethink their entire business models to cope with the new inflationary environment. Many airlines and automobile manufacturers are close to imploding. Restaurant chains are suffering; Starbucks just posted its first-ever quarterly loss, thanks to rising coffee prices and fewer people willing to shell out four bucks for a latte. Procter & Gamble just announced a rethinking of its global supply chain, with the aim of bringing production back from far-flung locales and closer to consumers to cut soaring shipping costs. Rubbermaid, the U.S. consumer-goods firm, has had to slash various lines of trash cans and storage bins because of the high cost of petroleum-based resins used to make them. The firm has also said it plans to raise prices on some existing items as much as 20 percent.

So far, many companies have simply eaten the higher costs and accepted lower profits, because consumers accustomed to the golden era of cheap global goods won't pay extra. But that may change. Surveys in both Europe and the United States now show consumers' expectations of inflation are at peaks not seen in years, and their willingness to pay extra is low. But for now, companies are taking the hit: airlines have seen their profit margins vanish entirely. The large California department store Mervyns recently filed for bankruptcy, in part because rising apparel costs couldn't be passed on to the consumer. "We can't quantify exactly how much emerging-market inflation is being exported to the West, but I suspect it's happening," says Morgan Stanley chief U.S. economist Richard Berner. He notes that shrinking profits have not yet produced a sharp drop in corporate spending, possibly due to one-time corporate tax breaks. Payback seems likely after those incentives expire late this year, he warns.

The end of the low-inflation age was entirely foreseeable, in retrospect. After the bursting of the tech bubble in 2001, Western central banks, led by the Fed, slashed interest rates to prop up battered markets. Many big emerging nations like China, with exchange rates pegged to the dollar, were forced to follow, though the cuts weren't needed in their high-growth economies. The result of rock-bottom interest rates was a flood of cheap money, the seeds of the current mess. Inflation was already rising when the credit crisis hit last year, prompting central banks to cut rates again, adding more cheap money to the fire. This time "inflation has traveled faster around the world" than it did in the 1970s, says Morgan Stanley Global economist Joachim Fels. "The global inflation rate is amplifying national results in a way that it didn't in the past."

The global forces that once restrained inflation are proving less strong, or more complicated, than people thought. Cheap goods made in China are still cheap in renminbi, but the weakening dollar has made them more expensive for Americans. And while the Internet is still a powerful tool for comparison shoppers and hagglers, it is not powerful enough to stem the tide of rising global demand. Harvard economist Dale Jorgensen says that since the mid-1990s, when the spread of information technology started to raise U.S. productivity dramatically, it has typically lowered the annual U.S. inflation rate by about .5 percent. That was a big cut when inflation was running about 2 percent, but much less significant now that it's topping 5 percent. "The Internet is helping, but it can't combat the threat of $200 oil, or spiraling food prices," says Jorgensen.

What's more, according to the Conference Board's chief economist Bart van Ark, the growth of a global knowledge economy is actually contributing to what may become permanent wage inflation at the top of the economic heap. "We always thought globalization would depress wages, but in fact, for highly skilled people it's inflating them," he says, noting that in places like China, IT salaries (already among the top) are rising fastest.