Jakarta: While prices have been rising in the US and Europe, the biggest increases are being felt in Asia, and countries such as India and Vietnam are already having to deal with double-digit inflation.
Sharp rises in global food and oil prices are now spilling over into wages and broader measures of inflation across Asia, as the Asian Development Bank (ADB) noted in a report released on Tuesday.
Workers are demanding higher wages to cover their rising living costs, and companies are imposing higher prices for a wide range of goods to cover accelerating production costs.
Costly supply: A women selling petrol in Karawang, Indonesia. Strong demand for the country’s commodities has insulated it from slow growth but rising prices are beginning to hurt, particularly the poor. (Photo: Kemal Jufri / NYT)
“The epicentre of the inflationary storm is really in Asia,” said Cyd Tuano-Amador, the managing director of monetary policy at the Philippines central bank.
Higher inflation in Asia is also starting to contribute to higher prices in the US. According to its labour department, prices for imports from Pacific Rim countries—mostly Asian goods—rose 2.7% in the 12 months through June, after falling 1.4% in the preceding 12 months.
Asia’s central bankers, who are preparing for their annual gathering on 28 July in Shanghai, China, have been unable to develop a united response to deal with the worst inflation threat in at least a decade.
In an interview on Tuesday, Boediono, the governor of the Bank of Indonesia, called for a coordinated international move towards tighter monetary policy, including higher interest rates by the US, so as to slow inflation.
In an era of global capital flows, so much excess money is now flowing through world markets that no single country can fight the international problem of inflation effectively by tightening its own monetary policy, Boediono said. Like many Indonesians, he uses only one name.
“I don’t think any one country, even as big as China or even the US, would be able to stomach the adjustment” of raising interest rates far enough to slow global inflation, he said.
World oil prices could fall by 30% if countries took coordinated action to reduce liquidity, he said. He attributed much of the recent rise in global commodity prices to excess money in circulation.
But Boediono said he was not recommending that Asian central banks sell any of their dollar reserves to put pressure on the US to raise interest rates. Asian purchases of dollar-denominated securities, led by China’s $1.8 trillion (Rs76.14 trillion) in foreign reserves, have played a central role in financing the American trade and government budget deficits and in holding down interest rates on mortgages during the recent American housing market decline.
Most central banks in Asia have been reluctant to give up any of their economic independence or challenge the US by coordinating their monetary and currency policies, even as they fret about rising prices.
“There is a legitimate concern about the recent developments on the inflation front,” said Y. Venugopal Reddy, governor of the Reserve Bank of India, in a speech late last month. “Oil price increase is now a global problem, making inflation a problem for all countries, both developed and developing. Hence, our solutions to the problem will also be similar, but tailored to suit our conditions.”
Zhou Xiaochuan, the governor of the People’s Bank of China, said this month during a visit to Switzerland that an interest rate increase might be needed in China to combat inflation there. While the rise in consumer prices slowed slightly in China last month, to 7.1% from 7.7% in May, inflation accelerated at the producer level, to 8.8% in June from 8.2% in May.
Tuano-Amador said the meeting in Shanghai was unlikely to produce any consensus on monetary policy coordination. “I don’t think that it’s on the table right now,” she said, describing the meeting as “more of a talking shop”.
As the ADB said in its report issued on Tuesday in Singapore, inflation has risen across the region. “The external economic outlook for emerging East Asia has dimmed amid prospects for slower growth, tighter credit conditions and higher inflation,” the bank said.
The report also mentioned that “heightened inflationary pressures will require more decisive tightening of monetary policies across much of emerging East Asia.”
The initial reaction of many governments and private sector economists across Asia over the winter was to see price increases as largely confined to food and energy—and therefore not requiring monetary policy responses such as interest rate increases. But broader inflation trends are now starting to become apparent. The core inflation rate, excluding food and energy, accelerated in Indonesia to 8.7% in May from 6.3% in December.
During the same period, the core rates rose in May in the Philippines and Singapore to 6.2% and 6.8%, respectively, from 2.6% and 3.5%.
Strong demand for Indonesia’s many commodities, from coal to palm oil, have insulated it somewhat from slowing growth elsewhere. But rising prices are starting to take a toll, particularly on the poor.
Halimah, a teacher, echoed the unhappiness of many Indonesians as she bought milk on Sunday at a street market in Karawang, a town in west-central Java. “It has been very difficult for us, especially on kerosene, cooking oil and eggs; they have been rising in price dramatically,” she said.
Central banks in the region have been struggling for months to respond to the US.Federal Reserve’s low interest rates. Low American interest rates are making it harder for the region’s central banks to raise their rates; doing so would make them more attractive for international investors and could produce rapid appreciation in their currencies.
Stronger currencies would lower the cost in local currency terms of importing oil and other goods. But stronger currencies would also reduce the competitiveness of exports at a time when demand for Asian goods is already weakening in the US.
Boediono said he saw some room for the Indonesian rupiah to rise against the dollar, but that the timing could not be forced on his country. “Some orderly appreciation,” he said, “would be helpful for us.”
Indonesia’s Boediono said that the US Federal Reserve should raise short-term interest rates, and that his experience during the Asian financial crisis made him believe that the Fed could act without causing excessive damage to the American banking system.
“I don’t think a move of 25 or 50 basis points,” or 0.25 or 0.5 percentage point, “would collapse it,” he said.
Ben S. Bernanke, the chairman of the Federal Reserve, told the US Senate banking committee in a testimony on 15 July that the US economy faces risks of a further slowdown and higher inflation. Analysts interpreted his comments as meaning it was unlikely that the Fed would either raise or lower interest rates soon. The target for the overnight borrowing rate among banks, or federal funds rate, stands at 2%.
Boediono spoke in an interview in his elegant, wood-panelled offices, where the international decor and even the styling of the panelling bear a striking resemblance to the governors’ suites at the Federal Reserve’s headquarters in Washington.
©2008/THE NEW YORK TIMES