Suppose I told you that since the middle of last year, the rate of inflation has been 39.2%. You'd probably assume it was a pretty bad joke. Nonetheless, the U.S. Labor Department's core Producer Price Index (PPI) for crude materials, which excludes food and energy, has indeed risen at a 39.2% annual rate -- about 3% per month -- since last July. And if energy price changes are included, the gain is even larger. How does this square with the zero-inflation scenario that Federal Reserve Chairman Alan Greenspan keeps talking about? A similar inflation situation happened a decade ago. The PPI for crude materials rose at more than a 20% rate during most of 1994. But Greenspan didn't take it lying down. He and his Federal Open Market Committee (FOMC) colleagues boosted the federal funds target rate to 6% from 3%, a level several times higher than the 1% rate that has prevailed since last June. The pattern a decade ago -- as is the pattern now -- was that during an extended recession and early sluggish recovery, producing firms shut down much of their excess capacity, and consuming firms cut way back on their inventories. But back in 1994 the result was that when real GDP and industrial production started to rise at above-average rates, temporary shortages developed, and prices increased at double-double digit rates, i.e., more than 20%. Interest rates were raised, and by early 1995, they were reducing the economy's growth rate. And by mid-1995, inflation was beginning a long decline. In contrast, in the current inflation cycle, short-term interest rates have not risen since last July, and long-term rates have actually declined. Financial markets are apparently betting that the recent surge in crude material prices is a flash in the pan and assume that the Fed will not find it necessary to react to this increase. The world, of course, is a different economic place now from what it was then. For example, as the U.S. economy was starting to grow at above-average rates in 1993, most of the rest of the world was in recession. Real GDP declined an average of 1.1% in the original Common Market countries in 1993 and rose only 0.3% in Japan. By comparison, the consensus forecast is for 3% growth this year in Japan and 2% in Euroland. An even bigger difference is the size of the Chinese economy. Although China's GDP figures are quite suspect, if we look at the industrial sector, production levels are now at least twice and quite possibly three times as large as they were in 1993. World demand for such primary commodities as steel, copper, lumber and cotton is substantially greater than it was a decade ago, while capacity has not increased very much. Yet, supply and demand of primary commodities aren't the real issue. The point is that manufacturers of such finished products as motor vehicles, machinery, and other durable goods are in the process of starting to raise prices. If the price increases stick, inflation in the U.S. and other world economies will jump, and interest rates will rise sharply regardless of what Greenspan and the FOMC do -- or do not do. What are the odds of this occurring? No one knows for sure, but I put them at better than 50% because of two factors: the weak U.S. dollar and the huge U.S. federal budget deficit. During times of recession and slack demand, these factors don't affect inflation. But now that the U.S. and world economies are both poised to grow at average or better rates this year, the continuation of negative real interest rates does point to higher inflation at the broader wholesale and retail levels. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.