Inflation dilemma deepens for Asian policymakers

Inflation dilemma deepens for Asian policymakers

Bangkok: Inflation accelerated more than forecast in Indonesia and South Korea in January, and quickened in Thailand, reinforcing expectations of increases in borrowing costs as policymakers struggle with rising food and oil prices.

Tuesday’s data was the latest to raise questions over whether central banks and governments in emerging-market countries are doing enough to tame inflation fuelled by rising world commodity prices and a resurgence in domestic economies.

“We think it is time now for most central banks to really begin further tightening policy rates, and for the ones who haven’t started yet to begin," said Leif Eskesen, chief economist for India and Southeast Asia at HSBC.

The head of the International Monetary Fund warned rising prices -- one of the factors behind anti-government protests in Egypt and Tunisia -- could cause social upheaval.

“Energy prices are rising swiftly, reflecting rapid growth in emerging economies," IMF chief Dominique Strauss-Kahn said.

“Food prices are rising too -- though here supply shocks are the main reason -- with potentially devastating consequences for low-income countries," he told an audience in Singapore.

South Korean consumer inflation in January spiked more than expected above the upper end of the central bank’s target as prices rose across the board, data on Tuesday showed, lifting chances for a back-to-back interest rate increase next week.

In Indonesia, Southeast Asia’s biggest economy, annual inflation hit a fresh 21-month high of 7.02%, topping both market forecasts and the central bank’s end-2011 target range of 4-6%. That caused some economists to project the benchmark reference rate will rise by 25 basis points on Friday.

Bank Indonesia has been trying to hold down its benchmark rate to avoid another wave of “hot money" capital flows and to support expected economic growth this year of 6.4%.

But that’s been undermined by the rising cost of food, raw materials and supply shocks caused by erratic weather. Tim Condon, economist at ING, reckons some of those effects will pass after this week’s Lunar New Year holidays in parts of Asia.

“We think the food price scare will dissipate in February when the Chinese new year effect passes," he said. “Typically month-over-month food price inflation peaks in January and February ahead of the main rice harvest in March and April."

After that, he added, prices retrace. “We expect the usual pattern to prevail this year," he said.

Everything is more expensive´

The data deepens fears that higher world commodity prices and resurgent demand will keep inflation near or at the peak of official target ranges in Asia’s emerging economies from Bangladesh to Indonesia and Thailand.

“Everything is more expensive -- cooking oil, vegetables, everything really," said Yupin Waiyarabut, a 38-year-old owner of a stall selling noodles on a busy sidewalk in Bangkok. “Food prices have increased a lot over 1-2 months."

Pressures from food prices may ease in coming months in Thailand, thanks in part to a bumper rice crop, but these could be replaced by the effects of rising oil prices, said Usara Wilaipich, an economist at Standard Chartered Bank in Bangkok.

“On balance, the Bank of Thailand is expected to raise rates by 25 basis points at its next Monetary Policy Committee meeting on March 9," she said after Thailand reported inflation quickening by 0.54% month-on-month from December.

“High energy prices will remain a key risk."

The Bank of Thailand has turned hawkish in recent months, raising its benchmark interest rate by a quarter of a point to 2.25% on 12 January following a similar increase in December.

Thailand has other sources of nascent inflation on its hands. Prime Minister Abhisit Vejjajiva’s government, for instance, has raised the daily minimum wage and will boost the salaries of civil servants ahead of an election expected this year.

‘Blame the chilli´

In Indonesia, food sellers have seen the price for their favourite spice, green chillies, jump more than five-fold.

“What can I do? My boss keeps reminding me to not be so generous about the chillies," said Fendi, one of many Jakarta food stall owners grappling with rocketing prices.

“Blame the chilli," exclaimed another stall owner, Darwari, who uses one name like many Indonesians. “My profit has been cut in half because of chillies."

In Bangladesh, traders have started to hoard rice following an increase in the local price of the staple. That and other food price increases pushed annual inflation to 8.28 percent in December from 7.54% in November, data showed on Tuesday.

The trends bode poorly for Asia’s emerging-market bond investors, with inflation eroding fixed-income returns.

South Korean government bond futures prices fell on Tuesday after purchasing managers at manufacturing firms reported input prices rising by their fastest monthly pace in nearly two years in January, indicating inflation could rise further.

The consumer price index’s annual rise of 4.1% in January and other South Korean indicators released separately prompted traders to boost their bets on a fourth-interest rate increase since the global crisis at the 11 February policy meeting.

They’re also a reminder of what’s hurting pocketbooks.

“Restaurant meals have turned ridiculously expensive. Not just in certain locations, but everywhere," said Kim Sun-hyung, a 25-year-old who works at a Seoul film agency.