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Asia’s Inflation Genie Leaps Out of the Bottle

Haritha Reddy wants to know why the price of tomatoes rose 200 percent in three days in the markets of central Uttar Pradesh recently. Aditya Rao thinks it’s “downright ridiculous” that traders are asking more than Rs50 ($1.10) for a kilo of sugar and about a Rs100 for a kilo of tuvar dal, a kind of split pea.

Outline of Asia, Map of Asia
CNBC.com
Outline of Asia, Map of Asia

As the rest of the world worries about economic growth, angry complaints from consumers such as these Indian bloggers have turned Asian policymakers’ minds to a different problem: rapidly rising inflation.

In many countries, the inflation genie is leaping out of the bottle, generating the biggest swings in year-on-year consumer price indices in the region since the 1997-98 Asian financial crisis.

India, where prices were flat in mid-2009, this week reported a year-on-year rise in its wholesale prices index, the most watched measure, to 9.89 percent from 8.6 percent the previous month.

China said last week consumer prices jumped to a 16-month high of 2.7 percent in February, up from 1.5 percent in January and uncomfortably close to the 3 percent target set by Wen Jiabao, the premier, only a week earlier.

Vietnam’s inflation has more than doubled to 8.5 percent in seven months, the Philippines is at 4.2 percent, having been flat in mid-2009, and South Korea is bumping up against its central bank’s 3 percent inflation target.

The pressure comes from varying sources. Robert Prior-Wandesforde, HSBC Asia economist in Singapore, says India’s inflation index is largely driven by food and oil prices, while Australian inflation, currently at 2.1 percent, is driven mainly by red-hot demand from China for commodities.

The main driver is the speed and breadth of the recovery generated by three quarters of double-digit, quarter-on-quarter annualized growth in gross domestic product in most of Asia outside Japan. That may be four when reports for the current quarter begin to emerge next month.

Economic output is on average 4 percent above the previous peak in the third quarter of 2008, with all the main economies back to pre-crisis levels except for trade-dependent Singapore, where a small gap remains to be made up.

The bounce has occurred in spite of continuing low demand for Asian exports in the U.S., the European Union and Japan, suggesting that Asian consumer spending has played a much bigger part than forecast.

According to DBS, the Singapore bank, private sector consumption is 7 percent higher than pre-crisis levels in the 10 largest Asian economies excluding Japan. Even more significant, stripping out the direct effects of government spending makes very little difference to GDP growth.

“Everyone says Asia doesn’t consume enough. Well, no disrespect, but everyone is wrong,” says David Carbon, DBS head of economic research.

“Where else in the world has consumption grown by 7 percent over the past five quarters? U.S. consumption is flat on the horizon. Same for Europe and Japan. That’s seven to zero in favor of Asia. Quite a drubbing for a place that supposedly doesn’t consume enough.”

Most economists expect GDP growth to moderate to an average of about 6.5 percent for the year as manufacturers push up against capacity limits, further stimulating inflation and pushing central banks to tighten monetary policy.

So far, only Australia, Malaysia and Vietnam have raised interest rates since the crisis, with the Chinese and Indian central banks relying on raising bank reserves requirements to tighten policy.

However, that is expected to change quickly, with the region’s two biggest economies expected to begin normalizing rates in the second quarter, as is South Korea.

Frederic Neumann, Asia economist at HSBC in Hong Kong, is forecasting that policy rates will be between 50 and 100 basis points higher in most countries by the end of the year, with Indonesia raising by 125bp, Pakistan 350bp and Vietnam 400bp.

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