In its October World Economic Outlook, the IMF forecast a rise in consumer price inflation in the advanced economies from 0.1% in 2009 to 1.1% in 2010. The increase is likely to be much larger barring renewed commodity price weakness.

The first chart shows the annual change in the consumer price index (CPI) for the Group of Seven (G7) major countries – a proxy for advanced economies – together with the 12-month movement in the IMF's world commodity export price index. The latter is projected forward assuming that commodity prices stabilise at their October level (the latest reading of the IMF index). The relationship suggests a rise in G7 annual inflation to at least 2% in early 2010 and an average for the year well above the IMF's 1.1% forecast.

Its projections for emerging and developing countries are also questionable. Spare capacity is limited in many emerging economies and consumer price indices typically assign a higher weight to commodities than in developed countries. Yet the IMF forecasts a decline in average CPI inflation for the group to 4.9% in 2010 from 5.5% in 2009.

Projected falls in Chinese and Indian inflation – to 0.6% and 7.4% respectively in 2010 – are particularly implausible. Chinese prices are likely to accelerate in the wake of 30% growth in the M2 money supply in the year to November while the Indian forecast implies a sharp reversal of the current rising trend – second chart – despite still-loose monetary policy.