Asian inflation not likely to soar

Asian inflation not likely to soar

SINGAPORE (Reuters): Inflation rates are on the rise across Asia following the sharp drop in currency values since the middle of 1997 but, with one or two exceptions, there is little risk of any Latin American-style inflationary boom, analysts say.

The key reasons are the softness in domestic demand, the lack of inflationary expectations, the use of price controls in some countries, and the widespread nature of the currency falls.

"Domestic demand is very weak. Wholesale prices are surging rapidly but suppliers can't pass on the costs to the consumer," said Christa Marti, senior economist at UBS Securities.

"Over the past six months we've seen higher import prices but at the same time these have not been passed on because there has been a degree of real economic contraction," said Andrew Fung, regional treasury economist at Standard Chartered Bank.

Fung also noted that in terms of food prices there had been a lot of intervention by governments to hold prices down.

Across Asia, excluding China and Hong Kong, currencies are down by between 15 percent and 70 percent against the dollar since July 1 last year.

Normally such a sharp move would bring with it surging consumer prices and the risk of a wages-price spiral, but this has conspicuously not happened in the Asian case. Or at least not yet.

In the year to January, consumer price index rises in year-on- year terms are 6.4 percent for the Philippines, 8.3 percent for Korea, 8.6 percent for Thailand and 18.1 percent for Indonesia.

In Malaysia and Singapore, which have only reported year to December rates so far, the CPI increases are 2.7 percent and 2.1 to 4 percent respectively.

Most analysts agree the country with the biggest risk for a full blown inflationary boom is Indonesia, where forecasts for 1998 inflation are around 25 percent. This compares with 1998 forecasts for Thailand of between 9 percent and 20 percent, for the Philippines of around 11 percent, and for Malaysia of around 5 percent to 6 percent.

They say one reason for this modest inflationary expectation is that monetary and fiscal policies have been tightened quite sharply across the region as a result of the credit crisis that accompanied the currency depreciations.

Another reason is that many Asian countries get their consumer goods, particularly food imports, from their neighbors.

Malaysia for example is largely self sufficient in food stuffs except for rice and some meat. It imports rice from Thailand, and the meat from India and Australia, which have all seen their currencies weaken against the U.S. dollar.

"Very few of Southeast Asia's consumer goods come from the U.S." said one regional economist.

But analysts do expect that once Asian economies begin to stabilize and confidence returns, suppliers will look to pass on higher costs and importers will begin replenishing stocks at higher prices.

At this point wages pressures could begin rising. At the moment, says Marti of UBS, there is no sign of a wages spiral. "I don't think in any of the Asian countries, with the exception of Korea, there will be a substantial wage inflation spiral," she said.

"In Thailand for example there is quite a lot of social willingness to take the hit on wages," Marti said.

Standard Chartered's Fung is optimistic that future price rises won't translate into higher wages.

"I think there may be big drops in real wages, these may be able to prevent a pass-on effect (of price rises) into wages," he said.

Fung expects inflation to rise sharply in coming months with most Asian economies reporting double-digit growth rates. But the rate of acceleration should level off in the second half of 1998 and inflation begin to fall next year.