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Food, not energy, now the risk for Asian inflation

Food, not energy, now the risk for Asian inflation
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First Published: Mon, Feb 26 2007. 02 04 PM IST
Updated: Mon, Feb 26 2007. 02 04 PM IST
By Reuters
SINGAPORE: Soaring oil prices have been the biggest menace to inflation in Asia for the past four years, but now that peril looks like being overtaken by a new one: food prices.
Although inflation in many Asian countries is relatively low at the moment, the danger was highlighted by a jump in food prices in Indonesia, Singapore and China at the end of last year, which triggered a pick-up in inflation there.
More recently, food costs pushed the annual rate of inflation in India up to 6.73% in early February, the highest in more than two years, and that’s put food prices in the spotlight ahead of this week’s 2007/08 budget.
For the moment, economists aren’t too worried about the problem feeding into general inflation since higher food prices tend to be driven by bad weather and are therefore temporary.
A retreat in oil prices from last July’s record highs and slower economic growth will limit the pressure.
But food prices are rising globally and may well warrant more attention than in the past, with India, China, Indonesia and possibly the Philippines seen as the most vulnerable to sustained increases.
“Certainly, food prices have replaced energy as the main driver of inflation in the region as a whole. There’s no question about that,” said Citigroup economist Yiping Huang.
“The only question now is, are food-price spikes sustainable? It is the key risk for inflation, but it is still more of a temporary shock at the moment.”
High food prices could give central bankers in India and China added reason to tighten monetary policy, while the monetary authorities in other parts of the region may think more carefully about lowering interest rates.
Watch food, not energy
Frederic Neumann, HSBC’s Asia-Pacific economist, says food price rises are especially worrying in Asia as food has a far bigger weighting than energy in measures of headline inflation in much of the region.
In the Philippines, for example, food accounts for around 50 % of the consumer price index (CPI) and energy about seven %. Similarly raw and processed food together account for about 42 % of Indonesia’s CPI.
The problem is not confined to Asia.
World wheat prices were at their highest in a decade late last year and are expected to rise further in 2007.
Wheat prices in India have risen about 20 % since September despite efforts to contain them, for example by releasing government-held stocks into the market.
“One big risk factor going forward is that El Nino is scheduled to return this year and this could affect Southeast Asia,” said Neumann.
Only a few months after Thailand suffered its worst floods in a decade, Thai officials say they are braced for a drought related to El Nino, an abnormal warming of the waters in the Pacific Ocean that causes wild swings in weather systems, which could hit rubber and rice output.
Officials have reason to worry -- prices of major crops in Thailand shot up almost 22 % in the fourth quarter, after a rise of about 19 % in the third quarter.
Bad infrastructure
Poor food distribution networks in India and Indonesia exacerbate the problems there and mean there is a greater risk of a spillover into wider inflation in those countries, analysts say.
“There is not a lot of faith in Indonesia’s logistics system, and that in itself could lead to inflation expectations building,” said Sin Beng Ong, an economist at JPMorgan.
“So the geography as well as the bureaucratic nature of the distribution of food makes Indonesia particularly vulnerable.”
Although inflation in Indonesia has dropped sharply from the 18.4 % seen in November 2005 after fuel subsidies were slashed, consumer prices in January were still 6.26 % higher than a year earlier.
In India, where rising food costs have been splashed across the front pages and have been a factor in local elections this month in northern states, further monetary tightening is expected in a bid to contain inflation.
Earlier this month the central bank raised the amount of cash banks have to keep with it on deposit, while in January it delivered a quarter-point rise in the main lending rate to 7.50 %.
“Quite clearly more has to be done,” said DBS Bank senior economist Wong Keng Siong.
An added problem, he said, was that labour markets in some countries were tight and there was a risk that rising inflation could become part of wage negotiations.
“In certain sectors in India, wage increases are high. So you may be in a situation where you have high rates of inflation and it becomes part of your wage negotiation,” he said. “The most obvious countries in Asia with this problem are India and China.”
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First Published: Mon, Feb 26 2007. 02 04 PM IST
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