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The U.S. and Europe have caught the inflation blues, but emerging economies have a full-blown case of inflation fever.

Global inflation is set to rise from 3.5% to 5.8% this year, the highest in nine years, says Merrill Lynch. Nearly two-thirds of the increase will come from emerging markets.

Bourses have been hit hard in developing countries with soaring inflation. Their central banks and policymakers have been slow to hike interest rates or let currencies strengthen.

As more emerging market countries finally step up to the inflation battle, their growth outlooks for next year will weaken.

“In most emerging markets, monetary policy and credit growth are far too stimulative. They need to throttle back,” said Nariman Behravesh, chief economist at Global Insight.

Developing nations don’t want to slow growth — especially with exports to the U.S. weakening.

“The longer they put it off, the worse the problem becomes and the harsher the medicine is going to be to get inflation under control,” Behravesh said.

A Morgan Stanley report says 50 countries, including India and Russia, are being torched by double-digit inflation rates.

China is key. Its inflation rate hit a 12-year high of 8.7% early this year but cooled to 7.7% in May. It likely continued to ease in June, analysts said.

“A moderation in Chinese inflation is in the cards,” Goldman Sachs said in a report Monday.

“By year-end 2008, China’s No. 1 economic worry will be slower growth and a squeezed export sector, rather than inflation,” said Donald Straszheim of Roth Capital Partners.

Policymakers in many developing countries blame the spike in oil and food prices for much of their inflation woes.

Rather than tighten monetary policy, they’ve blunted the impact of inflation with price controls and subsidies. Those moves keep demand artificially high, lifting global prices.

China, India and Malaysia have recently raised state-set energy prices.

Slowing the economic growth of developing countries is key to curbing inflation, says Edwin Truman, senior fellow at the Peterson Institute for International Economics.

“Inflation has become a global problem, and industrial countries alone can’t solve it,” he said.

Emerging economies that delay fighting inflation “risk a real hard landing,” he added, “because they’ll slam on the brakes.”

The European Central Bank has kept rates high to battle inflation, tightening by a quarter-point 15 4.25% just last week. The Federal Reserve, which has cut rates to thwart a housing slump and credit crunch, has signaled it may tighten by year-end, though many analysts doubt that.

The falling dollar has put some developing countries in a bind, some economists say.

Strong Currencies Urged

Many emerging economies, including Asia’s export-driven countries, peg their currencies to the dollar.

Those countries have balked at letting their currencies strengthen, because that would raise the price of their exports.

Fed Vice Chairman Donald Kohn, in a recent speech in Germany, urged emerging economies to drop their dollar pegs . Kohn said de-pegging would give them a freer hand to tighten monetary policy. Kohn and European colleagues urged emerging markets to do more, if not take the lead, in fighting inflation.

George Hoguet, an investment strategist at State Street Global Advisors, says Asia’s exporters, especially China, need to take tougher anti-inflation measures.

“One key to limiting inflation is appreciating Asian exchange rates,” he said. “What I think is likely to happen is that China will revalue the renminbi. When China moves, it will pave the way and bring along some of the exchange rates from other Asian countries.”

He expects China to wait to revalue the renminbi, or yuan, until after the Olympics of Aug. 8-24.

“The RMB’s pace against the dollar has accelerated, but on a trade-weighted basis it hasn’t moved that much,” Hoguet said.

Global Insight’s Behravesh agrees that Asian nations may follow China’s forex lead. But he says they will likely hike rates on their own.

More central banks seem to be getting the message. India, Mexico and Chile recently surprised with rate hikes.

Central Banks Move, Slowly

While some central banks have grudgingly upped rates, they’re still not doing enough, say economists. That’s because rate hikes haven’t kept up with spiraling inflation, so real rates continue to fall in many emerging markets.

Russia’s inflation has jumped to 15%. Official rates are less than half that.

Russia’s central bank did let the ruble rise on July 9 for the second time in a month to try to curb inflation.

In Brazil and Mexico, rates have been held “comfortably above” inflation rates, said a Goldman report. “Inflation in Brazil appears to be well-contained relative to other emerging markets.”

Some observers say too much is being made of the inflation-fighting policies of emerging economies.

“Ultimately it all comes back to one thing, which is oil,” said Michael Hartnett, a global equity strategist at Merrill Lynch. “Oil is very much setting global inflation expectations. Until oil comes off in a meaningful way, people are going to expect interest rates to go up to cope with inflation.”

Countries behind the curve in battling inflation are “being eschewed by institutional investors,” said a report by State Street, which tracks fund flow. Among the countries: Vietnam, Thailand, Indonesia and the Philippines.

Hartnett says bourses in countries whose central banks lack credibility in the inflation fight have been among the worst performers amid this year’s global market sell-off.

“The market is doing a lot of differentiating between emerging markets, rather than lump them all together,” he said.

India’s stock market has plunged 40%. Its inflation rate tops 11%.

Hartnett says the falling value of currencies in South Africa, South Korea and Turkey show that those countries are viewed as laggards in the inflation fight.

South Korea, which usually has fought to keep the won from rising, has been trying to prop up its currency in recent months, Truman says, because of inflation worries.

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