CENTRAL bankers and finance ministers from the world's 20 largest economies may say inflation risks have increased amid the fastest global economic expansion in decades, raising the specter of higher interest rates.

"Global inflation prospects and the monetary policy response" is a "critical" issue for Group of 20 policy makers meeting in Melbourne the next two days, Australian Treasurer Peter Costello said yesterday, according to Bloomberg News.

United States Federal Reserve Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Toshihiko Fukui are among G-20 officials attending the summit. Some are worried that sustained growth will fuel inflation, forcing interest rates up and hurting global growth just as the US economy slows.

"They're more concerned about inflation than growth," said Jean-Michel Six, chief European economist at Standard & Poor's in London. "There will be more hikes from the European Central Bank and the Bank of Japan. The Federal Reserve will pause, but it won't cut rates until the second half" of 2007.

The Fed raised rates 17 times before pausing in August at 5.25 percent amid signs growth was slowing. The ECB is poised to deliver its sixth increase in a year next month, taking its key rate to 3.5 percent. Central banks in Japan, China and the United Kingdom may also raise rates further.

"The debate is whether the US slowdown will be a benign process or a malign one in 2007," said Stephen Jen, global head of currency research at Morgan Stanley International in London. "That's a central issue for financial markets. The bond market says it will be malign, equity markets say it won't."

Stock markets in the US, Europe and Asia are close to six-year highs, signaling confidence in economic prospects. Bond markets are gloomier. Long-term US bond yields have been lower than short-term rates since January, suggesting a slowdown.

All six US economic recessions since 1968 were preceded by 10-year Treasury yields staying below Treasury bill rates for at least three months, according to Federal Reserve Bank of New York economists Arturo Estrella and Mary R. Trubin. The European yield curve inverted for the first time in six years on November 9.

The slumping US housing market and a widening trade deficit slowed the pace of US economic growth to an annualized 1.6 percent in the third quarter, the lowest since the first quarter of 2003. Residential housing construction had the biggest decline since 1991.

Even so, the S&P 500 share index in the US reached a six-year high on Thursday. Europe's Dow Jones Stoxx 600 index touched the highest in more than five years the same day. Japan's Nikkei 225 Stock Average reached a more than five-year high on April 7.

"The recent increase in equity prices is supporting household wealth even as house-price inflation slows rapidly," said Robert Lind, head of macroeconomic research at ABN Amro in London, who forecasts US economic growth will pick up again in the fourth quarter. "We expect only a slight moderation in global activity in 2007," allowing central banks to "tighten monetary policy further."

The global economy may expand 4.9 percent in 2007 after growing 5.1 percent this year, 4.9 percent in 2005 and 5.3 percent in 2004, according to the International Monetary Fund. The world has not enjoyed such a sustained period of growth rates faster than four percent since the early 1970s.