If there was any doubt that the global economy remains tightly intertwined, rising commodity prices should put it to rest.
Both the U.S. unemployment rate and the amount of idle factory space are abnormally high, stark evidence that the economy is still well below its full potential.
But price pressures are building in commodities despite the ample U.S. economic slack, thanks in large part to demand from emerging markets. The Reuters Jefferies CRB index <.CRB> of commodities is up 28 percent since July.
The pressures are concentrated in food and energy, the two categories the Federal Reserve prefers to ignore when it examines current data to get a sense of future U.S. inflation trends. The central bank's reasoning is that those items are too volatile to provide a reliable guide.
That doesn't help businesses faced with the margin-bruising prospect of paying more for raw materials while customers expect discounts in a still-weak economy.
Figures this week are expected to show U.S. businesses absorbing the higher costs. Economists polled by Reuters think Thursday's producer price index will show a 0.8 percent gain, but consumer prices, due a day later, probably rose just 0.4 percent.
The gap looks even wider on a year-over-year basis, with PPI expected to show an increase of 3.8 percent while CPI is up just 1.3 percent.
Companies may not be willing to eat the higher costs forever, particularly with the economy showing some signs of picking up speed and consumer spending strengthening.
My sense is manufacturers (will) try to be aggressive on pricing in the first half of the year, said Norbert Ore, chairman of the ISM manufacturing business survey committee, which produces a monthly poll on factory activity.
The latest ISM installment, released earlier in January, showed a big spike in prices paid for materials.
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This is not the front edge of a U.S. inflationary storm. That would require a much stronger labor market capable of generating intense wage pressures.
But it does have Fed Chairman Ben Bernanke's attention. He told lawmakers on Friday that the central bank was watching fuel prices in particular to ensure they don't put a strain on consumers' spending power.
I think the main reason oil prices are up is the strength of emerging markets, the demand for energy from China and other fast-growing emerging market economies, Bernanke said.
Many of those emerging markets are having a very difficult time containing inflation -- and unlike the Fed they cannot overlook food and energy costs when setting policy.
Food tends to take up a larger share of household budgets in emerging markets than it does in the United States, so it often carries a bigger weight in consumer price indexes.
Barclays Capital economist Julian Callow said the surge in commodity prices was leading investors to question how much longer the world's central banks can keep interest rates ultra-low.
For the Fed, inflation is nowhere near levels that would spark tightening talk.
Currently we do not expect that the surge in commodity prices is sufficient to generate downside risks to our private consumption forecasts, though this will be a point to watch if it continues, Callow said.
Emerging markets are in a very different situation. China, India and a host of others have taken steps to try to keep prices in check and Callow expects more to come.
For Bernanke and his Fed cohorts, one concern is that emerging market pressures could eventually feed back into U.S. prices. Specifically, China's manufacturers must contend with not only rising commodity prices, but rising labor costs too.
Credit Suisse economists think China is nearing a point where its seemingly inexhaustible labor supply struggles to keep up with demand.
The one-child policy launched in the late 1970s thinned the pool of young workers, and factories are already finding they must offer huge wage increases to lure rural migrants.
This is the beginning of the end of an era -- China as the anchor of global disinflation, Credit Suisse analyst Dong Tao wrote in a recent note to clients.
The sharp turning of China's labor market will not only redefine China's own growth model, production, consumption and income distribution, but will also have a major impact on inflation, financial prices and the manufacturing outsourcing model for the rest of the world.
(Editing by Dan Grebler)