Serious global inflation, which is not a problem at the moment, could become so within a few years, warns leading Australian economist Warwick McKibbin.
The Australian National University professor, who was on the board of the Reserve Bank of Australia until a few months ago, was the keynote speaker at the New Zealand Institute of Economic Research's annual meeting last night.
He put forward an argument that the very loose monetary policy in much of the developed world after the global financial crisis was being exported to emerging economies, especially those whose currencies were pegged to the US dollar.
"That is why we're seeing much higher energy and commodity prices than you would normally see when there is a cyclical downturn in the United States and Europe."
McKibbin also sees a risk that political gridlock in the US - with Democrats refusing to cut government spending and Republicans refusing to raise taxes - will lead to a rerun of the inflationary aftermath of the Vietnam war.
The US has an incentive to inflate away a high level of government debt by letting inflation swell tax revenues, transferring the real burden of debt from debtors like itself to creditors, many of whom in its case are foreigners.
"They funded the [Vietnam] war through budget deficits which they monetised in the late 1960s and early 1970s.
"The whole world was pegged to the US dollar and therefore the whole world had an inflationary surge," he said.
"The incentives are such that inflation is going to be the default, unless Congress gets its act together."
McKibbin argues that there is much more to the current slump than a lack of demand which will yield to conventional monetary and fiscal stimulus.
Underlying it is a complex and historic shift in global economic and political power, arising from economic reforms in China, India and other emerging economies.
That shift has not only greatly expanded the global economy but reset where production and consumption occur.
It has been reflected in major shifts in relative prices for goods over the last decade or two, with energy and mineral prices, and to a lesser extent agricultural prices, climbing while prices for manufactured goods have stagnated.
Advanced economies need to respond to those signals and adjust where they put their resources.
But that structural adjustment has been retarded by policies which socialise private debt and flood the system with liquidity.
If we are heading for an inflationary world, the question for New Zealand and Australia will be whether to resist it or go with the flow.
The historical evidence, McKibbin said, was that for every 1 per cent of global inflation, countries tend to import about 0.6 per cent.
"So if there is world inflation of 10 per cent, you're going to start with 6 per cent inflation before you either make it worse or make it better," he said.
In theory, a country can defend itself from imported inflation by allowing its currency to appreciate sufficiently.
"But historically once the bigger economies are inflating you tend to get dragged along.
"It is tough for independent central banks like the RBNZ and RBA to actually deal with that."
The danger is the possibility of ending up with an exchange rate which appreciates more than is needed to offset imported inflation.
And this undermines the competitiveness of exporters and firms competing with imports.