The decline in inflation rates in advanced economies to historically low rates has been widely reported.  But inflation is increasing in some of the largest emerging markets. This divergence poses dilemmas for policymakers in those countries.

The annual difference between the GDP-weighted average inflation rates of high income countries and developing nations has fluctuated between 3-4% between 2010 and 2012 (see data here). More recently, the gap has jumped to 4.8%. Among the countries where prices are rising more rapidly are Brazil (5.8% in the most recent month), Egypt (10.5%), India (10.1%), Indonesia (8.3%), Russia (6.2%), and South Africa (5.5%).  Moreover, all except Russia are recording current account deficits.

The increase in prices is drawing attention. In Brazil and Indonesia, rising prices are fueling popular discontent with the governments. The Russian central bank has admitted that it will miss its inflation target for the year. Arvind Subramanian finds inflation in India worrisome, in part because it is unprecendently high.

What fuels the rises? In many emerging markets, the governments have sought to offset reduced demand by their trade partners in the advanced economies by stimulating domestic demand. The result has been increases in domestic credit and household debt, and in these countries escalating prices.

Some central bankers have responded by raising their target interest rates. In India, the new target rate is 7.75%. Brazil’s central bank has raised its target rate to 10%, and Indonesian monetary policymakers have hiked their rate to 7.5%. South Africa’s central bank has kept its rate unchanged, but signaled that this may change.

These increases could leave the central bankers in a quandary. After blaming the Federal Reserve for capital flows to their countries, it would be awkward if the same policymakers were now seen as responsible for creating the conditions that could attract capital. Moreover, higher rates might choke off the domestic spending that it is seen as essential. But allowing inflation to continue unchecked could result in harsher measures later. Of course, higher growth in the advanced economies could alleviate many of these problems. Convergence can work in more than one direction.