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Over the past several decades, Asia has produced numerous economic miracles as nations transformed from impoverished backwaters into global competitors. But one miracle that has received scant attention has been the way the region in the first half of this decade has enjoyed generally rapid growth — headlined by booms in China and India — without awakening the beast of inflation that so often roars when economies get overheated. From 2003 to 2007, Asian economies (not including Japan) expanded at an average annual rate of 8.1%, triple that of advanced economies. Over the same period, inflation in Asia averaged a relatively mild 3.5%.

But the beast is back — and Asia could be headed into turbulent economic times. Merrill Lynch says that in May, the average inflation rate throughout the region reached nearly 7%, led by spikes in oil and food prices. That was sharply higher than the 2.5% rate in May 2007 — and that's just the regional average. In India, inflation jumped to an 11.6% annual rate in June, according to the latest government figures, the highest in 13 years. In Vietnam, one of Asia's fastest-growing economies, inflation has reached as high as 27% in the past few months.

Policymakers and central bankers are scrambling to raise interest rates and tighten credit to get inflation under control. But these same measures suppress the investment and consumption that generates growth, threatening to put the brakes on Asia's unusually fast and relatively untroubled expansion. Glenn Maguire, chief Asia-Pacific economist for Société Générale in Hong Kong, estimates that GDP growth in East Asia (excluding China and Japan) could sink from about 6.5% this year to 5% in 2009, the slowest rate since 2001. Inflation, Maguire says, "is the largest risk to Asian growth since the financial crisis" of 1997.

This combination of slowing growth and soaring inflation turns economic policymaking into a tricky tightrope act — one with potentially ugly consequences for Asian governments that get the balance wrong. In the past 40 years, rapid price rises contributed to the collapse of two Indonesian regimes; inflation was also a factor during China's Tiananmen Square uprising in 1989. Consumer price inflation stirs up the middle classes because it can quickly erase years of hard-won personal gains. And inflation can be particularly cruel to the poor, because families are forced to spend a larger share of their meager incomes on necessities. UNICEF estimates that an additional 1.8 million children in India may be on the brink of malnutrition due to high food costs as households scale back on meals. In the Philippines, farmers, unable to afford fuel for tractors, are reverting to water buffalos to plow their paddies.

But to avoid unrest, leaders cannot blindly adopt draconian anti-inflation measures. That's because they risk public backlash if they overreact to the inflation threat and kill economic growth in the process. Developing nations need to grow quickly to create jobs and increase incomes for their large populations. Asians from India to South Korea have come to expect high growth as almost a God-given right, and in an increasingly democratized region, voters won't hesitate to toss out of office any politician who doesn't deliver the goods.

With prices soaring over the past several months, however, doing nothing was not a realistic option. Policymakers must fight inflation now in hopes that they can get it under control quickly and promote growth again in the near future. Most central banks in Asia have started raising interest rates. The Reserve Bank of India increased its benchmark rate twice last month to a six-year high of 8.5%. Indonesia's central bank raised its rate for three consecutive months. Governments "have to keep expectations [about inflation] anchored," says Andrew Freris, senior investment strategist for Asia at BNP Paribas Private Banking in Hong Kong. "For the next six to nine months, it's going to be tough. It is going to be tight."

The challenge is especially difficult because prices are being driven higher largely by a global surge in oil and food prices, which individual governments can do little to control. A barrel of oil today is nearly five times more expensive than it was in 2003; rice prices tripled between January and May alone. "Currently, inflation is not of domestic origin, and it's not as if the government has many instruments in its hands to deal with it," says Marut Sengupta, head of policy at the Confederation of Indian Industry. That problem has left some officials uncertain how to proceed, especially in countries such as Vietnam, which joined the World Trade Organization last year and has been opening up its economy to market forces. Vietnam suffers from the highest inflation in Asia; the country's Prime Minister, Nguyen Tan Dung, recently acknowledged during an interview with TIME that "promptly responding to adverse impacts of the global economy is a relatively new matter for us."

Of course, inflation is not just a problem in Asia. World Bank President Robert Zoellick recently warned that the world was "entering a danger zone." He called rising food and oil prices a "man-made catastrophe" that could quickly reverse the gains made in overcoming poverty over the past seven years. For now, though, there is more talk than action on the international front, so Asian governments are battling on their own. There are some early signs that anti-inflation measures could pay off. After peaking at a 12-year high in February, inflation in China will begin to taper off in coming months, economists are predicting. To cool down its overheating economy and help throttle price increases, Chinese officials employed a mix of policies that included limits on bank lending, a throwback to the country's command-economy days. Yet, despite these steps, the mainland's growth does not appear to be slowing appreciably. Investment bank Lehman Brothers expects China's GDP to expand 9% this year and 8% in 2009. "I think they are striking a very delicate balance between controlling inflation and supporting growth," says Qing Wang, chief China economist for Morgan Stanley, which projects even higher growth in China — 10% this year and 9.5% in 2009.

Indeed, even though inflation throughout the region is likely to continue to rise in coming months, no one is expecting an economic calamity. "We don't believe that Asia will run into another financial crisis," says Park Cyn Young, senior economist at the Asian Development Bank in Manila. Asian countries have large hard-currency reserves and relatively healthy banks, and so are far better prepared to absorb external shocks than they were during the region's last recession 10 years ago. "This time, [Asian policymakers] have learned their lessons and will be more alert."

But that's not much comfort to those who were counting on Asia's boom to continue as uneventfully as it has over the past several years. Amit Kumar, a 22-year-old New Delhi resident, started a small building-materials business two years ago when India's capital was enjoying an unprecedented construction boom. But with interest payments on his bank loans mounting and customers dwindling, he closed up shop six months ago and started driving a taxi. The job is "beneath my status," Kumar complains, "but at least it keeps a roof above my head." If Asian governments don't get the fight against inflation right, it might take a miracle for him to keep that too.

• Michael Schuman