Biggest Risk to Asia's Economy? Not What You Think

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As Asian economies shift into recovery mode, inflation appears to be low on the priority list of central bankers, but HSBC's Asia economist warns against such complacency, as he expects a resurgence in price pressures this year, fueled by wage growth.

The Philippine central bank said on Tuesday it expects inflation to remain benign in 2013 and that its monetary policy stance of low interest rates remains appropriate. Indonesia's central bank, which kept interest rates at a record low of 5.75 percent last week, says inflation is manageable, while South Korea has just lowered its expectations for inflation and is tipped to lower rates again.

(Read More: Bank of Korea Holds Rates, Hints at Cut to Come)

"Everyone thinks inflation is not an issue right now, but it is going to make a come-back and while in the past inflation has been all about food and energy, this time it's going to be about wages and that's a much more pernicious threat," Frederic Neumann, the co-head of Asian economic research at HSBC told CNBC Asia's "Squawk Box" on Tuesday.

He said he expected wage pressures to be most significant in Thailand, Indonesia, Singapore and Hong Kong.

"Central bank easing will not be there forever because inflation is coming back and I think it will come back sooner in emerging markets than people currently expect," Neumann added.

He expects Indonesia, Thailand and South Korea to be the first to hike interest rates in Asia, which is likely to lead a tightening cycle.

Independent economist Andy Xie told CNBC earlier this month that he believes India and Southeast Asia are most vulnerable to inflation risks, forecasting that inflation in India could rise to 10 percent and above 5 percent in Southeast Asia.

(Read More: Watch Out, Asia. Inflation Is Coming)

A rise in the minimum wage in parts of Southeast may fuel wage increases, analysts say. Thailand has just raised its daily minimum wage to almost $10, while Indonesia, Southeast Asia's biggest economy, is expected to implement a double-digit wage hike this year. Following protests late last year, Jakarta, Indonesia's capital city, agreed to raise its monthly minimum wage for 2013 by 44 percent to $230, a move that follows hikes in other parts of the country.

Robert Prior-Wandesforde, director for non-Japan Asia economics at Credit Suisse in Singapore, says that while he does not believe inflation is the key issue for Asian economies this year, Indonesia is the country he would single out in terms of heightened inflation risks.

"The one we're most concerned about is Indonesia, partly because of the wage issue and partly because of the weaker rupiah and general signs of overheating," he said, referring to the Indonesian currency, which has fallen about four percent in the past six months.

Turning Hawkish?

"The only Asian country we expect a rate increase from this year is Indonesia," he added. Three out of 17 economists polled by Reuters last week forecast Indonesia's central bank to start lifting rates from June due to the risk to inflation, currently around 4.3 percent.

In China, the region's economic powerhouse, the consumer price index hit a 7-month high of 2.5 percent in December from a year earlier, leading some economists to believe that China's central bank, which eased monetary policy twice in 2012, could move to tighten policy in the second half of this year.

(Read More: China Inflation Accelerates – Time to Remove the Punch Bowl?)

Analysts say that Thailand's central bank, meanwhile, which met last week sounded a hawkish tone when it said economic growth this year could be higher than expected.

"(The Thai central bank's) statement strengthens our view that upward policy normalization is likely at some point this year, possibly in May and July," HSBC's ASEAN economist Su Sian Lim said in a note.

According to HSBC's Neumann, inflation in Asia is also likely to be pushed up by excess liquidity in regional markets, the result of monetary stimulus by major central banks globally.

"We're drowning in liquidity here, so looking ahead it looks as if inflation is going to make a come-back. I'm a bit worried about the upside risks to Asia not necessarily the downside risks," he said. "Ideally I would like to see monetary tightening come through as soon as possible but realistically that's not possible given that we still have tail risks, everybody's still worried about Europe etc."

- Additional reporting by CNBC's Ansuya Harjani