EMERGING MARKETS WEEK-Inflation growing on investors' radar

By Walter Brandimarte

NEW YORK, May 11 (Reuters) - Emerging markets investors will likely walk on eggshells this week as spiraling commodity prices start raising more inflation concerns than supporting the idea of economic growth in developing countries.

With a slew of U.S. data expected this week and U.S. crude prices hovering near record highs of $126 a barrel, the short-term outlook for high-yielding currencies seems a little shaky.

"I wouldn't be surprised in the next two weeks if inflation is the story again. Particularly in emerging markets that is going to be the buzz word," said David Spegel, global head of emerging markets strategy at ING bank in New York.

High commodity prices have been the key drivers for the good performance of emerging markets this year, as investors bet global demand for raw materials will support growth in developing countries, which export them.

Inflation has been the undesired side effect of that story, however. Investors had mostly overlooked inflationary pressures in developing countries, until emerging markets eventually started posting losses on Wednesday, when a barrel of U.S. crude oil topped $123.

Emerging equity markets closed the week with losses of more than 1.5 percent, according to the Morgan Stanley Capital International index for the region .MSCIEF.

Emerging bond prices declined 0.35 percent during the same period, the JP Morgan EMBI+ index 11EMJ showed. Emerging debt spreads over U.S. Treasuries widened 14 basis points, showing an increase in investors' aversion to risk.

"Risk perception ceased declining over the last few days as sky-high oil prices choked investors' appetite for risk," Dresdner Kleinwort's analysts Valentin Marinov and Arnab Das wrote in a research note.