Inflation may rise beyond forecast mid-year peak

March 9, 2008
Singapore Democrats

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Melissa Chia
Reuters
8 Mar 08

As oil prices continue to rise despite talk of a slump in global growth and bottlenecks persist in food supplies, economists are questioning the view that Asia’s soaring inflation rates will moderate by mid-year.

Annual inflation had been expected to peak around the middle of 2008 after a steep rise in oil and food prices last year started to fall out of the index calculation, said Mirza Baig, a strategist at Deutsche Bank in Singapore.

“Assuming, of course, that oil prices and international prices for wheat, soy bean, etc. stabilise here,” he said. “Except that they don’t seem to be stabilizing right now.”

The prospect of recession in the United States has barely stopped the run-up in oil prices, which are at record levels above $100 a barrel and still rising. Gold, a traditional hedge against inflation, has risen to within reach of $1,000 an ounce.

Across Asia, there is no let-up in rents or food prices, which are feeding into general inflation – at a 26-year high in Singapore, an 11-year high in China and a 12-year high in Vietnam – and pushing up wages.

Among soft commodities, wheat prices are at record highs after a 120 percent surge in 14 months.

Some analysts argue that the spike in prices is seasonal, that food supplies will improve in the summer as China’s disruptive winter storms abate and oil demand in the northern hemisphere weakens when heating becomes unnecessary.

However, brokerage Nomura thinks these analysts have underestimated the impact of China’s extreme weather and the country’s dependence on imported commodities, which, it argues, will keep prices elevated for far longer than expected.

Tomo Kinoshita, an economist at Nomura, said exported inflation from China’s double-digit expansion would add to pressures, particularly in 2009, as rises in wages and materials such as steel generate higher prices in the rest of Asia.

Another inflationary factor that will not simply disappear with winter is a structural shift stemming from the growing middle class in Asia, especially China and India, which will spur demand for goods.

Pork, Diesel

In China, the price of pork in January was 58.8 percent higher than a year earlier and was the main factor behind a rise in food prices of 18.2 percent. In turn, food was responsible for one-third of the overall rise in consumer price inflation, which hit an 11-year high of 7.1 percent.

In Vietnam, housing and construction costs climbed by 16.4 percent in February from a year before, while diesel and kerosene rose by 36.3 percent. Overall inflation was at a 12-year peak of 15.7 percent, the highest in Asia.

In Indonesia, where crude oil accounts for more than 10 percent of the country’s imports, the central bank raised its inflation forecast for this year to between 6.0 and 6.5 percent after annual inflation in January spiked to 7.36 percent.

The upshot for policy is that monetary conditions may have to be tightened, or at least not loosened, and currencies allowed to appreciate, even though global demand for goods from the export-reliant region may be waning.

The optimists still think the price winds will blow in the other direction in mid-2008: the drop in demand stemming from a downturn in the United States, plus a drop in oil and food costs, will bring inflation down.

“The outlook for weaker global demand should help to ease these pressures and we see it happening as soon as the second quarter, with oil potentially going as low as $80,” said David Mann, a strategist at Standard Chartered Bank in Hong Kong.

But some analysts say core inflation, which excludes food and oil prices, could be pushed up if demand in Asian economies holds up and the prices of non-food items such as production materials and property continue to rise, dragging wages up.

“We expect Asian consumption to remain robust this year, especially for rice, dairy (products), wheat, oil and iron ore,” said Sean Callow, a strategist at Westpac Banking.

He also expects global demand for commodities, some of it speculative, to ensure inflation in Asia remains well above the average of recent years by year-end.

Mann acknowledged that in Vietnam, for instance, inflation would remain relatively high in 2008 at 9.0 percent due to “very strong domestic demand, plus the greater impact of energy prices there”.

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