Well might Kevin Rudd have had beads of sweat on his brow the other day when declaring war on inflation. Telling his audience of Perth businessmen over breakfast that “the most pressing economic challenge domestically is inflation” was the easy part. Actually doing something about it will be much harder as the financial markets of the world take on the look of a meltdown. The prime minister and his Treasurer Wayne Swan, in fact, may well have committed their new Government to a policy that is unachievable whatever their best endeavours. That prospect is enough to make any politician perspire.

Not that Mr Rudd can be attacked for strongly putting the case that the current inflationary outlook is the unwelcome legacy he has been left by his predecessors. Bouquets or, more appropriately, brickbats for the December quarter figures are due to the defeated Coalition which succumbed to the temptation of keeping government spending rolling along during the long run of years when the economy steadily grew, failing to build up a substantial budget surplus that would be handy if, as seems increasingly likely, the United States drags a substantial part of the world into recession.

What the Labor Government appears likely to confront is slowing growth internationally without the anti-inflationary pressures that normally accompany them. In the US during an election year, neither Republicans nor Democrats will want to prescribe anti-inflationary medicine. The Democrat-controlled Congress is falling over itself to support the call by a Republican President to stimulate the economy through tax cuts.

The Federal Reserve has cut interest rates to try and avoid, or at least postpone, a recession despite the US having the same signs that exist in Australia of inflation being on the verge of breaking out. The spectre of stagflation, with its rare double of falling gross domestic product and rising prices, looms large.

The slowing of growth that a US recession will export should at least go some way to curbing demand pressures in Australia but it will not remove our inflationary pressures. This time around, food prices will provide the biggest input to rising prices, even though in the December quarter they fell slightly. Unlike last year with the booming bananas, this time the rises will be longer lasting.

The news from around the world on the trend in food prices is quite alarming. Abdolreza Abbassian, grains economist at the Food and Agriculture Organisation (FAO), was reported saying this week that record food prices are unlikely to ease in the foreseeable future, as high grain demand and low stocks mean the world remains vulnerable to possible food shocks.

“The wheat story is far from over,” Mr Abbassian said. If there is the slightest weather problem next year in any major producing country or in any major developing country importer that also produces, such as China or India, wheat prices will soar again.

The demand for bio-fuels in Europe and the United States will also continue to pressure prices of maize and soya. The United States, which exports around two thirds of the world’s traded maize, already increased the area under maize cultivation by 18 percent last year, at least in part to meet the demand for bio-ethanol, used as a fuel in automobiles.

“If the US wants to meet the same demand this year it has to maintain that sort of performance — which means it may have to plant less of other crops”, said Mr Abbassian. “This is why soya bean markets are reacting rather violently to developments.”

UK-based consultants Bidwells Agribusiness expressed a similar view about the influence of the bio-fuels industry on food prices. The Financial Times reported Richard Warburton, head of Agribusiness at Bidwells, saying it was impossible to know yet whether the agricultural market was facing a structural or a cyclical change. But he warned that, even if it were cyclical, “we are up against a long cycle of rising prices”. Wheat and soyabean prices have surged to records, corn prices hit a 12-year high this year and rice prices have doubled in the past year to levels not seen since the mid-1990s. Meat, poultry, eggs and dairy products prices have also increased sharply.

Alan Wheatley, China Economics Editor for Reuters, headed his analysis earlier this week “Across Asia, food is the new oil as prices surge,” as he wrote of governments from India to Indonesia scrambling for solutions as it dawns on them that sky-high food prices might not fall any time soon. The common thread in every country is unease over a sustained rally in global commodity prices that has carried wheat, palm oil and soybeans to all-time highs.

With food accounting for a third of China’s consumer price basket and even more in some other countries, the high prices are a ticking time bomb for the region, where fuel increases periodically touch off sometimes violent protests. “If the inflation problem gets out of hand, it could have devastating implications for not only economic but also political stability,” said Yiping Huang, an economist with Citigroup in Hong Kong.

In Pakistan, where the government has blamed a shortage of flour on smugglers and hoarders, paramilitary troops have begun escorting wheat trucks to deter thieves. Malaysia briefly rationed cooking oil this month before the government boosted supplies of subsidised oil.

In China, where inflation is at an 11-year high, the government has taxed grain exports to boost local supplies and resorted to command economy-style price controls.

India has been considering cutting import duties on edible oil, while in Indonesia the government has subsidised cooking oil refiners and suspended a 10 percent duty on imported soybeans. Yet 2,500 tofu and soybean cake producers gathered in Jakarta on 14 January to protest over a doubling of soybean prices since the start of the year.