Asia Macro and Strategy Outlook: Inflation Risks Rising – Policy and Market Implications

Food inflation trends show significant disparity across the entire region — Food prices have become a serious issue in VN, IN, KR and CH, but remain relatively benign in SG, TW, MY and PH. We attribute this to four factors: source of food supply, how the food in the CPI basket is defined, FX appreciation, and domestic food subsidy policies. With food prices expected to be problematic this year, coupled with an increase in energy prices, commodityfueled inflation pressures will likely remain a lingering issue for the region.

alexaranda090300001Against this backdrop, monetary conditions are still loosening for many — Our MCI estimates show that monetary conditions in the last 6-12 months have largely been “loosening” for all countries except the Philippines and India, though in the latter’s case, policy looks loose relative to LT history. This implies more room for Central Banks to tighten monetary policy further

Energy prices adding fuel to the fire

We’ve recently upgraded our oil price forecast, with our colleagues calling for WTI crude oil prices to reach $100/bbl in 6-12 months’ time (previously forecasted at $93/bbl), after oil prices have already risen about 24% in the last five months. Improving confidence in global recovery should continue to support prices, on top of support from investment flows. 3 The direct impact of energy prices on inflation should be less than that of food, as the weight of energy is less than 30% the weight of food in the region’s CPI basket. Moreover, the pass thru is also blunted in a number of countries in that subsidize fuel and other energy prices to varying degrees –China, India, Indonesia, Malaysia, Pakistan and Vietnam.

Headline already seeping into core
Core inflation pressure is already creeping higher in many countries. We think inflation concerns in Asia go beyond food and energy as the risk rises that it seeps into core. The most acute core inflation pressures can be seen in India, which come against a backdrop of very strong growth and a more prolonged high headline inflationary environment, and in Vietnam where the macro policy credibility of the Central Bank is weak and the currency has sharply depreciated. However, we are also seeing rising core momentum in other countries, particularly China, Malaysia, and Singapore and, to a lesser extent, Indonesia and Thailand. In general, core pressures are seen in the large domestically-driven economies as well ASEAN, but seem generally more benign so far in Taiwan and Korea
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