July 23 (Bloomberg) -- The rising cost of goods the U.S. imports from China may be an early warning signal that central bankers from the U.K. to India are about to pay a price for a cause they've championed: globalization.

China, a source of cheap manufactured products for the past two decades, may be starting to export inflation as the world economy grows at the fastest pace in a generation.

Prices of U.S. imports from China increased 0.3 percent in May from the previous month -- ``the first sign I've seen that this disinflationary pressure'' from China's cheap goods may be fading, former Federal Reserve Chairman Alan Greenspan said last month. Prices rose 0.3 percent again in June, the biggest back- to-back increase since record-keeping began in December 2003.

With monetary policy makers struggling to contain pressures from other forces beyond their control -- increased trade, faster capital flows and record commodity prices --officials including Bank of England Governor Mervyn King and New Zealand's central bank Governor Alan Bollard may have to raise interest rates or maintain them at higher levels for longer than they might prefer.

``Domestic monetary policies may nowadays be less potent in controlling domestic inflation than in the past, a disturbing thought for central bankers,'' says Joachim Fels, chief global fixed-income economist at Morgan Stanley in London.

Complicating Policy

The increasing integration of the world's economies isn't fully understood, even by those who have benefited the most from expanding international trade and investment. Fed Chairman Ben S. Bernanke has said it may complicate policy making, and the benefits of cheaper imported goods are, at least, countered by higher costs for raw materials and energy.

Booming global demand is already forcing up food and commodity prices and squeezing spare productive capacity at a time when more investment from abroad weakens central banks' grip on the supply of money in their economies. The International Monetary Fund predicts that the amount of slack will shrink to 0.1 percent of global gross domestic product in 2008 from 0.4 percent last year.

Officials and economists will debate the shifting dynamics of globalization and its impact on monetary policy during the next two days at the European Central Bank in Frankfurt. Speakers at an invitation-only forum include ECB President Jean- Claude Trichet and Fed Governor Frederic Mishkin.

Quickest Pace

The conference comes as China, the world's fourth-largest economy, reports the quickest pace of growth in a dozen years, pushing inflation to 4.4 percent in June. On July 21, China raised its benchmark rate to an eight-year high of 6.84 percent.

In the past, central bankers have harnessed the effects of low-cost production from China and other countries such as India to hold down interest rates and stimulate domestic growth. The Organization for Economic Cooperation and Development in Paris estimates that globalization knocked as much as 0.2 percentage point off inflation in rich nations from 2000 to 2005, even as the world economy sped up and buoyed raw-material costs.

Now, when ``inflation is above target, the cost of reducing it has been increased,'' says Robert Lind, chief economist at ABN Amro Holding NV in London. Interest rates in the U.K. and the 13-nation euro area are already the highest in six years, with officials hinting more changes may be on the way.

A `Growing' Risk

The Bank of England's policy makers highlighted import prices as a ``growing'' inflation risk and one of the reasons for this month's increase in the benchmark rate to 5.75 percent.

It isn't only the cost of imported goods that troubles King. On May 16 he said that British house prices are ``heavily influenced by what is happening overseas, independent of U.K. monetary policy,'' as wealthy foreigners purchase property.

New Zealand's Bollard is expected to raise the official cash rate to a record 8.25 percent this week, in part because overseas orders for butter and milk are pushing up dairy prices.

The Bank of Canada this month increased its key rate for the first time in more than a year to 4.5 percent partly because of surging investment in the western province of Alberta to develop the world's largest pool of oil reserves outside the Middle East.

A `Predominant' Concern

In the U.S., while Fed officials say inflation remains their ``predominant'' concern, tensions between the threat to growth from housing and the dangers of rising energy and food prices give the central bank little reason to adjust borrowing costs. Bernanke raised the benchmark rate a year ago to 5.25 percent, where economists say it may remain until 2008.

India's central bank faces ``severe policy challenges'' in managing capital lured by record growth, says Governor Yaga Venugopal Reddy. Foreign investment in India's stock market is rising, along with direct investment and overseas borrowing by domestic companies. This boosted the capital-account surplus by 74 percent to $17.9 billion in the three months through March.

From April through June, the rupee had the biggest quarterly gain in at least 34 years. The bank has purchased dollars to slow this rally, which threatens to increase prices of Indian goods and make them less competitive in world markets.

Selling in New Zealand

In New Zealand, Bollard's central bank also began in June to sell its dollar for the first time in two decades as the currency trades at a 22-year high.

Brian Hilliard, chief economist at Societe Generale SA in London, sees some mitigating factors that may help offset the perceived negative effects of globalization.

He argues that a pool of cheap labor from rural areas in developing countries will keep prices in emerging markets in check. While labor costs are picking up, United Nations data show that only about 40 percent of Chinese and 29 percent of Indians live in cities, compared with 74 percent in industrial nations.

At Goldman Sachs Group Inc., Chief Economist Jim O'Neill says globalization will continue to spur competition. Even if prices rise in China, he says, companies will shift production to lower-cost nations such as Vietnam, Bangladesh and Pakistan, which will help contain inflation.

``Globalization is still a powerful force,'' Hilliard says. ``We shouldn't give up on it so quickly.''

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.netJohn Fraher in London at jfraher@bloomberg.net

Last Updated: July 22, 2007 15:16 EDT