Last week: The jobs report last week could be the last disappointing one for a while. Layoffs continue to slow, as reflected in the latest decline in the number of people signing up for unemployment checks. But reducing the number of people who are losing jobs is only half the battle. The other half is generating new jobs. That’s coming. The Conference Board Leading Economic Index® for the U.S. is signaling a pickup in overall economic performance. The Conference Board Employment Trends Index™ (think leading index just for the labor market) is also suggesting imminent improvement, as shown in the accompanying chart. Why and why now? If the economy is gaining strength, more workers will be needed to fill demand for products and services. Second, business now sees a way to pay those wages. And that is perhaps the biggest change in the economic environment.

THE SITUATION ABROAD

The global economy continues to show signs of improving. German exports rose by 0.5 percent in December. That performance was more or less in line with the recent trend. The rise in Japanese consumer confidence was anything but a continuing trend, increasing for the first time in seven months. Japanese workers have been coping with very low income gains and therefore limited spending increases. This pick up in confidence reflects the hope that paychecks may fatten over the next few months and allow shoppers to spend a little more. These are but two signs of a global economy expanding now and potentially lifting growth rates over the very near term. That is also the signal from the Leading Economic Indexes for developed countries around the globe.

FACT OF THE WEEK

47 percent. Brazil’s economy has been growing by about 4 percent over the past decade and can be expected to maintain or possibly even increase this pace over the next few years. To fuel this growth, Brazil has greatly expanded public, commercial, and household credit. Last year, outstanding credit reached about 47 percent of GDP. Meanwhile, inflation has started to heat up. To keep inflation in check, Brazil has raised interest rates. It is also proposing cutting public expenditure, perhaps by the equivalent of $50 billion. Keep in mind, Brazil has a budget surplus equivalent in 2010 to 3.1 percent of GDP. Still, the hope is that by cutting spending and raising rates, inflation will be prevented from moving above 4.5 percent this year, down from almost 6 percent last year.

QUESTION OF THE WEEK

How worrisome is inflation?

The global economy is currently running on two tracks. The developed economies are growing slowly, with a lot of idle capacity and elevated levels of unemployment. Several important emerging economies (including China, India, and Brazil) are expanding much more robustly. In this mix, prices of energy, metals, and food have started rising sharply, not all for the same reason and with different consequences in different economic sectors — with different monetary and fiscal policies.

Everyone everywhere needs energy, and food. But the impact of rising prices is different, based on how much of one’s budget (household or business) goes for food or energy. Emerging economies generally spend more money on energy. And their households spend more of their money on food. This is a big reason, but not the only reason, why China’s inflation rate is close to 5 percent, Brazil 6 percent, and India closer to 10 percent. Prices in the euro-zone are closer to 2.4 percent, and practically half that in the U.S.

That goes some way in explaining why China is increasing interest rates again. Indeed, one criticism is that emerging economies may be too slow in tightening policy and one consequence could be slower economic growth while inflation intensifies. The Federal Reserve, meanwhile, continues to maintain very low short-term interest rates as U.S. inflation hovers below 1.5 percent. Another important factor is the rise in price, especially with respect to food, due to one-time events. Heat and drought last summer limited crop production and sent prices soaring this fall and winter.

The big concern in all this is so-called secondary or knock-on effects. Inflation could start in food and energy prices but might quickly move to other prices and cause wages to rise in response. In fast-growing economies, that’s a problem. In economies with significant slack and elevated unemployment, this sequence is slower and more muted.

Finally, this dual-track world, with ever more closely interconnected financial markets, quickly rockets market responses back and forth. That helps explain some of the gyrations in exchange markets. For example, Mexico (a big energy producer) is now dealing with a sharply rising peso. How will this story play out in 2011? Higher overall inflation and slower economic growth is one possible path, but only one of many. The only thing clear now is that this story will continue to command headlines for months to come.