UBUD, Indonesia -- With high and volatile oil prices, it appears that a rough road is ahead for those countries with currencies that have become weaker relative to the U.S. dollar. Perhaps one of the biggest concerns is that Taiwan, as an importer of oil, may face a new wave of inflationary pressures that could exert upward pressures on interest rates and cause a slowdown in the rate of economic growth.

But rising oil prices should not be seen as the primary cause of inflation. The simple truth is that, by themselves, rising oil prices cannot cause inflation. Those that think otherwise seem to have forgotten the hard-earned lesson that inflation occurs when too much new money or credit is pumped into the economy.

In any event, like most industrialized economies, Taiwan has a smaller weight assigned to oil and energy in the basket of consumer goods that is used to measure inflation. This reflects the declining importance of industrial production relative to services and information technology.

The overall picture for other emerging market economies is slightly more complicated since most of their currencies have fallen against the dollar. Given that all contracts for oil products throughout the world are denominated in U.S. dollars, countries with weakening currencies face double jeopardy. However, some emerging market economies benefit from price rises since they are net exporters of petroleum prices (for example, Indonesia, Malaysia, Mexico and Venezuela). Other emerging market economies have also been able to decrease their dependency on oil imports.

Inflation is unlikely to be a problem in a country unless its central bank expands the rate of growth of the money supply to support levels of consumption seen before the upsurge in oil prices. A steady monetary hand will induce consumers and producers to behave rationally and decrease their use of oil products in response to higher prices.

A more likely scenario of sustained high prices for oil is a slowdown in gross domestic product growth, especially in the emerging market economies. Matters will be made worse if governments are tempted to offset rising oil prices by providing subsidies to farmers or industrialists who clamor for relief.

But what about a weakening currency? Unfortunately, there is not much that Taipei or any other government can do that will make matters better. If they raise interest rates to prop up their currencies, it will only make things worse by raising borrowing costs for business investments. The connection between foreign-exchange values and key economic variables is different from that in the past -- when trade flows were perhaps the most important single determinant of foreign-exchange values.

Exchange rates now reflect a variety of key variables, including relative rates of inflation (higher inflation; weaker currency), relative rates of interest (lower interest rates; weaker currency), relative economic performance (lower growth rates; weaker currency) and expectations about the future (pessimism about local economic performance; weaker currency).

Attempts by governments to manipulate their currencies using their foreign reserve balances or monetary policy are less effective than in the past. And there is considerable evidence that attempts to monkey with exchange rates lead to greater volatility in foreign-exchange markets.

Taiwan and other countries facing higher oil import bills and weaker currencies can avoid inflation by remembering that it is always a monetary phenomenon. Avoiding persistent increases in price levels is a matter of prudent central bank policies.