Higher costs could increase low inflation in Asia
As the global economy recovers from the pandemic, inflation is rising in advanced and emerging economies. The pent-up demand fueled by stimulus and pandemic disruption is helping to accelerate inflation, which is spreading around the world through global factors such as rising food and energy prices and soaring prices. shipping costs.
The chart of the week shows how inflation in Asia has been more subdued than in other regions, allowing central banks to keep interest rates low and support the economic recovery. However, lukewarm price hikes from Asia could see greater momentum next year. The outlook remains uncertain and central banks should be prepared to tighten their policies if inflationary pressures and expectations intensify.
Several factors explain the fall in inflation in Asia. Among emerging Asian economies, a delayed recovery has maintained core inflation, which removes volatile food and energy costs, operating at half the rate of its peers in other regions.
And the cost of food, which accounts for about a third of the baskets in the Consumer Price Index, rose 1.6 percent over the past year, compared to 9.1 percent in other regions. . This reflects unique factors such as a strong harvest in India, a rebound in the pig population following a recent swine flu outbreak in China and contained increases in rice prices.
In contrast, falling inflation in advanced Asian economies reflects a different set of factors. The region has experienced more moderate energy inflation than Europe and the United States.
Finally, some Asian countries have managed the pandemic in such a way as to avoid major supply disruptions and the resulting pressure on prices. Korea has adopted comprehensive contact tracing and testing, for example, while Australia and China have contained infections with border closures and localized lockdowns.
Strong inflationary pressures will eventually ease globally, as the supply-demand mismatch recedes and stimulus fades. But in 2022, as the recovery strengthens, the lingering impact of high transportation costs could put an end to benign inflation that Asia enjoyed in 2021.
A benchmark measure of global shipping costs, the Baltic Dry Index, has tripled this year through October: Our analysis shows that such large increases in shipping costs drive inflation for 12 months, which could add about 1.5 percentage points to the pace of inflation in Asia in the second half of 2022.
Policymakers in the region must be ready to act.