Asians sure are unique; they don’t eat and they don’t use energy.
That’s nonsense, of course, yet, it’s how some are viewing Asia. Even as prices rise faster in some places than during the 1990s, investors are pushing the “core inflation” argument.
If you strip out the most volatile items, such as food and energy, the rationale goes, Asian inflation looks pretty tame. Oh, it’s only high pork prices, China bulls say. It’s only because crude oil keeps rising, Asia-market enthusiasts retort.
Yet, such arguments are taking on shades of denial as 2008 approaches and inflation accelerates.
It’s hard to generalize the price environment. After all, Japan, by far the region’s biggest economy, still faces deflation. In India, Asia’s No. 3 economy, pressures have eased this year. And overall consumer prices are growing at a 3% annual rate, or less, in Hong Kong, Malaysia, the Philippines, Singapore and South Korea. The data may be masking the inflation already coursing through economies such as Bangladesh, China, Indonesia, Pakistan, Sri Lanka, Taiwan and Vietnam. For example, Singapore’s consumer prices could accelerate from 2.7% now to as much as 5% in the first quarter of next year, says Chua Hak Bin, Singapore-based economist at Citigroup Inc.
It’s also hard to generalize about why Asia is heating up. In some cases, meat or agriculture prices are helping to drive increases. In others, it’s everything from new taxes on goods and services to campaigns to stamp out corruption. Yet, there are a few common threads: high oil prices, low short-term interest rates and undervalued currencies.
Asia’s brush with inflation needn’t be a disaster. It’s a natural side effect of strong growth and the increasing amount of foreign capital heading into the region’s markets. So long as central bankers and economic policymakers act responsibly and transparently, Asia can avoid excessive price increases. That’s easier said than done. The costs of inaction will be higher public debt yields, slower growth and less buoyant equity markets. It may be very difficult for central bankers, for example, to get away with raising interest rates as much as inflation risks warrant. It may be equally hard for politicians and exporters to stomach stronger currencies. All this is a reminder that some Asian capitals may lack the political will to do what’s necessary here.
The World Bank last week said East Asia’s economies will expand at the fastest pace in more than a decade in 2007, even as US import growth slows and the fallout from the subprime-loan crisis unfolds. East Asia, which excludes Japan and the Indian subcontinent, is expected to grow 8.4% this year and 8.2% in 2008.
China is a perfect example of the risks that policymakers face. “The authorities are rightly aiming at avoiding excess demand and the spillover of high food prices into generalized inflation, and mopping up liquidity and raising interest rates will continue to be needed,” the World Bank said in a 15 November report. “However, the main macroeconomic task remains to contain the rising trade surplus, and a stronger real exchange rate is the most obvious tool.”
Obvious, but also politically explosive. China’s consumer prices rose 6.5% in October from a year earlier, matching August’s gain, the biggest in more than a decade. The news has economists such as Wang Qing of Morgan Stanley concerned that the world’s fourth biggest economy is on the verge of overheating.
China shows the futility of finding comfort in core inflation figures. Price increases for non-food items were just 1.1% in October, the same as September.
“Food is still the primary force driving prices upward, although in a poor country where one-third of the CPI basket is food, I would think that rising food prices must affect wages and, through wages, the rest of the economy,” says Michael Pettis, a finance professor at Peking University.
The same goes for higher oil prices, which can only be dismissed for so long.
When crude oil hit $50 a barrel, analysts told investors not to worry. Similar noises are being heard as oil approaches $100 (Rs3,930) a barrel. How much longer can economists and investors live in denial that commodity prices will eventually filter into economies? Some nations are becoming more serious about inflation. In Indonesia, prices rose 6.9% in October, near the upper end of the central bank’s range of 5-7%. Deputy central bank governor Hartadi Sarwono, says Bank Indonesia wants the currency to be “stable and strengthen” to help “tame inflation”.
Accelerating inflation may give Asian policymakers their biggest test in a decade. It doesn’t help that the challenge comes amid turmoil in global credit markets, an uncertain outlook for the US and increasing “hot money” capital flows. Asia really needs to stand and deliver to prove it can handle the investment flowing its way. The region now has the chance to show how far it has come from the dark days of the 1990s—or hasn’t. Bloomberg
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