INFLATION THREATENS EMERGING MARKETS

London, January 31- December's UK inflation figures may have hogged the headlines, but inflation is already a much bigger problem in many emerging markets. In Asia and North Africa, the inflation genie is well and truly out of the bottle; sharply rising prices were a key factor behind the recent unrest in Tunisia, for instance. How central bankers and governments deal with it could have a profound effect on the prospects for these increasingly popular markets.

Food forms a much bigger proportion of the inflation basket in developing economies, while manufacturing-based economies use a lot of energy compared to service-based ones - and much of that energy, or the fuel to generate it, is usually imported. The share prices of Asian industrial stocks are increasingly sensitive to rising commodity prices as investors worry about squeezed margins.

This has been brought sharply into focus by the flooding in Queensland, which has already pushed up the price of metallurgical coal (used as a reagent in steelmaking) for delivery in China by 12 per cent to $287-a-tonne (£180). According to National Australia Bank, it could be March before 25 of the state's existing 57 coal mines resume normal production. Mining analysts Wood Mackenzie believe it is reasonable to expect a range of $400-$500 per tonne in the near term. Spot prices for a tonne of thermal coal (used in power generation) have hit $139, an increase of $46 since the beginning of September and the highest level since September 2008. Oil prices are flirting with $100 a barrel.

Tim Moe, chief Asia-Pacific strategist at Goldman Sachs, recently confirmed that the investment house had scaled back its assessments for both the Indian and Chinese economies, citing the former's current account deficit, and the latter's inability to put a cap on its credit boom, as factors that have contributed towards an inflationary environment.

He believes both economies are dangerously over-heated; if he's right, investors who've poured money into emerging market funds may indeed find out that past performance is not a guide to future returns. And while mining and oil stocks are obvious short-term beneficiaries of higher prices, in the longer term they may face higher input costs and lower demand growth.

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