During most of the past decade the idea of inflation as a menace to global prosperity faded. A problem that for most of the postwar era was an economic pestilence ceased to register as a big issue.

A tidal wave of cheap goods from Asia allowed Western shoppers to become used to ever-lower price tags. Central banks like the Bank of England, charged with keeping inflation in check, had never had it so easy. Inflation sank to historic lows as year-on-year rises in the cost of living dropped to low single figures, and interest rates plunged.

It marked a double dividend for living standards. Economists talked of “the death of inflation”. The economic dragon of the Seventies had finally, it seemed, been slain. Abruptly, however, inflation is back with a vengeance. The inflationary dragon was far from dead, merely dormant.

As in the Seventies, a driving force behind the inflation threat is soaring oil prices. But just as four decades ago, a drastic surge in energy costs is coupled with huge increases in prices for an even more basic necessity: food.

The fallout has been as startling as the upward spike in the prices of oil and foodstuffs. Across the world, a popular backlash has erupted.

In the developing world, the poorest struggling to eke out existences are being forced to cut back on meat to afford a meagre diet of rice and vegetables. The middle classes of poor nations, and the poor of middle-income nations, face a brutal blow to living standards. Food riots have erupted in countries as diverse as the Philippines and Egypt. In the West, the toll may be less vicious but the consequences are still far-reaching. As sharply rising living costs leave consumers feeling a severe squeeze on their pockets, governments are coming under fire.

The intensity of the danger from inflation is hampering the efforts to fend off the threat that a global credit crunch, as well as housing market downturn in the US and Britain, will trigger economic setbacks, if not recessions. Trying to keep a lid on inflation, central banks have been forced to limit interest rate cuts they might have made to bolster growth.

At the heart of the problem lies the reemergence of China as an economic power, along with the rise of other mainly Asian emerging market nations. These trends have unleashed massive extra demand for commodities and energy.

At the same time, the rising incomes of millions of Asia’s poor who are migrating to its cities has triggered a shift to Western-style diets. Since feeding animals means even greater consumption of cereals, crop prices have also charged upwards.

Western efforts to promote biofuels have meant tracts of land once used for food being given over to crops for this purpose. Droughts in Australia and other disruptions have exacerbated food shortages. Worldwide stocks of wheat and rice have dropped from about 30 per cent of annual consumption in 2000 to only 15 per cent.

Oil prices are, meantime, kept at record levels by a combination of scant spare capacity for extracting and refining crude, strong global demand and Middle Eastern unrest, as well as speculation.

A growing number of economists believe that the fundamental forces now at work will keep food and fuel prices high for years to come.

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• B&B shareholders forced into funding rescue
• John Lewis department store sales plunge 8.3%
• Families turn to credit to cover mortgage bills