Current inflation data out of Asia might suggest that the more recent upward pressure may be tempered in the near-term. Monthly data has indicated that Singapore and Indonesia saw near-term peaks in January while China and South Korea had to wait until March to witness the same. In the Antipodean countries, which report inflation on a quarterly basis, we have yet to see if Q1 was the near-term peak, with Q2 data not scheduled until mid/late-July.
What has been the cause of the loss of upward momentum? Is it merely a base effect or have we actually turned the corner?
First, let us analyse what caused the spike in inflation in the first place. A massive rally in commodities certainly played its part – a 60 percent increase in crude oil prices since mid-2010, 70 percent in copper, 138 percent in corn and 110 percent in wheat (the latter two driven in part by unusual weather patterns/catastrophes across the globe). Asia, compared to the rest of the world, could argue that at least there was some strength in economic activity (see table) to justify some upward pressure on inflation but certainly that argument may be looking a bit stretched and might come unstuck in coming months.
Looking forward, certainly the base effect will start to play a greater role in slowing the upward momentum in year-on-year comparisons in coming months, bearing in mind Asia started its last big run-up mid-2010. But will that be enough? The strong rally in commodities has been partly attributed to the Federal Reserve’s QE2 measures, with ultra-easy monetary policies and bundles of cash eagerly striving for any kind of return. (Not forgetting the recent US dollar weakness, which has been another driver in boosting the commodity sector.) Commodities look like they are finding a base after May’s hefty sell-off and earlier cost-push pressures might start to materialise again.
Currently, the slight easing off in inflation is giving Asian central banks a bit of breathing space in the rush to hike rates (China’s last rate hike was April 6, South Korea’s on March 6 and Indonesia’s on February 4) but, despite many central banks (and governments for that matter) asserting that the current pressures are temporary, we can expect pressure to mount as we begin the third quarter.
Looking at the composition of the CPI baskets across the region, housing, transport and food make up over 50 percent of inputs with the food component ranging from 31.8 percent in China to 22 percent in Singapore and a lowly 15.44 percent in Australia. It is difficult to see how interest rate hikes can curb cost-push inflation from supply chain shortages but further upticks in CPI will generate louder calls for rate hikes. Current expectations are for at least two more rate hikes from the Peoples Bank of China by the end of the year, but there is an increasing risk that it would not be enough. Back in April the central bank governor said that faster appreciation of the Yuan would be added to the toolbox for fighting inflation but so far no acceleration has been observed.
The Asian consumer tends to be a bit more optimistic than their western counterparts (especially in growth times!) but mumblings and grumblings on the streets of Asia are becoming more widespread. We feel that the complaints will likely increase in fervour before seeing any reduction.