Inflation fears on the rise

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - The specter of inflation has risen over financial markets and is likely to haunt trading in stocks, bonds and currencies this week with oil at record highs and central banks balancing price fears with economic weakness.

Current thinking among monetary officials will be on display and keenly watched with minutes of last meetings being released from the U.S. Federal Reserve, Bank of England, Bank of Japan and Reserve Bank of Australia.

The issue for the central bankers -- and, by extrapolation, for markets -- is how moves to lower interest rates to stimulate ailing economies can be sustained at a time when prices are rising globally.

"Inflation is too high in the U.S., in the UK, in the euro area and in various emerging economies," said Lex Hoogduin, chief economist at Dutch investor Robeco Group.

"The risk (is) that wages will start to increase. At the moment we are on a knife edge."

Hints from the central banks that they are becoming more worried about inflation are likely to impact assets in different ways.

Currencies are sensitive to individual countries' interest rate prospects. The dollar, for example, has been rising lately as investors have begun to scent that the Fed's rate cutting cycle may be nearing a pause.

Inflation concerns, meanwhile, have already hit bonds and could do so again this week. Yields remain relatively low given the backdrop of economic concern. Inflation would be expected to change this.  Continued...